ifo Economic Forecast Autumn 2023: German Economy Continues to Cool

Price-adjusted gross domestic product will decline by 0.4% this year. In the next two years, economic output is expected to increase by 1.4% and 1.2%. The inflation rate will fall further from an average of 6.0% this year to 2.6% next year and 1.9% the year after.

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Situation of the German Economy

The German economy stood still in the first half of 2023. High inflation eroded the purchasing power of private households and prompted the European Central Bank to raise key interest rates sharply. Consumer spending and construction activity suffered as a result, as real household incomes fell and financing costs rose. But industrial activity also ran out of steam. Although the supply-side bottlenecks that were still conspicuously hampering production last year receded into the background, the cooling of the global economy on the demand side became more and more evident. In many places, central banks put the brakes on the economy by rapidly and sharply raising key interest rates in order to keep inflation under control. In addition, despite a steep drop in energy prices, there has so far been no significant turnaround in production in Germany’s energy-intensive industries.

“Contrary to expectations so far, the recovery will probably fail to materialize in the second half of the year. The slowdown is continuing, and this trend is seen across almost all industries.”

Prof. Dr. Timo Wollmershäuser, Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts

Forecast for the German Economy

In recent months, the mood in the German economy has clouded over noticeably. Virtually no sector has been spared. Contrary to expectations in the summer, the recovery is therefore unlikely to materialize in the second half of the year and the economic slowdown is likely to continue. Construction companies, particularly in the housing sector, are likely to gradually run out of orders, as the extensive cancellations of existing orders and the decline in new orders have continued until recently. As a result, construction output is likely to decline in the coming quarters. The manufacturing sector is also unlikely to provide any economic stimulus for the time being. Demand for industrial goods in key sales markets will remain weak and pick up again only towards the end of the year. Private consumption is expected to recover gradually in the second half of the year. The increase in disposable household income will remain strong and, with inflation rates falling slowly, will also lead to an increase in purchasing power.

Overall, price-adjusted GDP will decline by 0.4% this year. In the next two years, economic output will then increase by 1.4% and 1.2%.

Key Forecast Figures for Germany

	2022	2023	2024	2025
Gross domestic product (percentage change over previous year)	1.8	-0.4	1.4	1.2
Employment (1.000 persons)	45.596	45.923	46.042	45.974
Unemployment (1.000 persons)	2.418	2.591	2.582	2.430
Unemployment rate (in % of civilian labor force)	5.3	5.6	5.6	5.3
Consumer prices (percentage change over previous year)	2022	2023	2024	2025
- Headline inflation	6.9	6.0	2.6	1.9
- Core inflation (excluding energy)	4.9	6.1	3.1	2.4
Unit labor costs (percentage change over previous year)	2022	2023	2024	2025
- EUR billion	-96.9	-91.5	-79.6	-70.1
- in % of GDP	-2.5	-2.2	-1.9	-1.6
Balance on current account	2022	2023	2024	2025
- EUR billion	162.0	269.2	306.9	311.3
- in % of GDP	4.2	6.5	7.1	7.1

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bun-desbank; 2023 to 2024: forecast by the ifo Institute.
© ifo Institute Sept. 2023

The weakness in Germany’s economy will largely bring employment growth to a standstill and initially drive a further increase in unemployment. The unemployment rate will average 5.6% this year and next – 0.3 percentage points higher than in 2022. The rate is not expected to fall back to 5.3% until 2025. Despite the economic recovery, however, employment will not rise. This is due to demographic change, which will shrink the potential labor force from 2025 onwards. In a similar vein, the growth rate of production potential will also drop markedly to just 0.5% in the second half of the decade.

Inflation will fall further, from an average of 6.0% this year to 2.6% next year and 1.9% the year after. Gas and electricity prices in particular will become cheaper for consumers and fall below the price caps set by the German government at the beginning of next year. As a result, the energy component should lower inflation over the forecast period. The core inflation rate (i.e., the increase in consumer prices excluding energy) will decline more slowly and remain above the headline inflation rate at 3.1% and 2.4% over the next two years. In particular, inflation at labor-intensive service providers will decline only slowly because rising wage costs will keep price pressures high.

Germany’s budget deficit will narrow only slightly in the next two years to 1.9% and 1.6% of economic output, respectively, compared with 2.2% this year. The ifo Economic Forecast Summer 2023 still assumed faster consolidation. One of the factors affecting this is that a significantly higher outflow of funds from the Climate and Transformation Fund is now expected. In addition, subsidies to microchip manufacturers were taken into account in the national budget. The current account balance is expected to rise again to 7.1% of economic output by 2025, after falling temporarily to 4.2% last year as a result of the sharp rise in import prices.