ifo Economic Forecast

ifo Economic Forecast Spring 2022: Consequences of the Russian-Ukrainian War Slow the German Economy

To take account of the imponderables regarding the further course of the Russian-Ukrainian war, two scenarios were considered for the forecast. The base scenario assumes only a temporary increase in raw material prices, supply bottlenecks, and uncertainty. In the alternative scenario, the situation initially worsens before gradually easing from mid-year. Under these assumptions, GDP is expected to grow by only 3.1 percent (base scenario) and 2.2 percent (alternative scenario) this year, noticeably less than previously expected (3.7 percent). In the coming year, growth is then expected to be 3.3 percent (base scenario) and 3.9 percent (alternative scenario).

The German economy took a hit from two further waves of the coronavirus in the winter half-year 2021/22. However, the economic consequences were significantly less severe than in the previous waves. Although economic output in the consumer-related services slumped similarly sharply at the end of 2021, sales recovered in January 2022 and thus much sooner than a year earlier. As a result, the chances were initially good that the German economy would start the year on a strong note. This was also helped by German manufacturing, which until February was able to continue the growth path it had embarked on in the fourth quarter of 2021 after a lengthy lean period.

The escalation of the Russian-Ukrainian conflict and the outbreak of war on February 24 changed the economic situation in Germany as well.

  1. Global market prices for many raw materials have risen dramatically. Contrary to expectations, the inflation rate has not decreased since the beginning of the year. Rather, consumer prices and in particular energy and food prices have continued to rise at strong rates. This is reducing the purchasing power of many households and dampening the recovery in consumer spending.
  2. A number of sanctions have been imposed on Russia. Among other things, these are likely to affect trade in goods and thus the production and export business of German companies.
  3. As a result of the war, there are production stoppages in Ukraine. This is likely to exacerbate bottlenecks in the supply of intermediate products and keep the recovery of industrial value added in Germany at a sluggish pace.
  4. Uncertainty has increased significantly, as the duration and outcome of the war and the further development of sanctions against Russia are difficult to assess. This is reflected not least in the high volatility of current and expected market prices for energy commodities, which is likely to place an additional burden on companies’ and households’ willingness to spend on investment and durable consumer goods.

Overall, economic output is likely to have increased in the first quarter of 2022. In March, however, there was an economic setback, which is likely to dampen the positive overall balance of the winter quarter. Industrial production took a major hit as a number of large companies cut back production and ramped up short-time work. Retail sales are also likely to have suffered from the sharp rise in energy prices. Overall, the rise in consumer prices in the 1st quarter alone is estimated to have resulted in a loss of purchasing power of around EUR 6 billion. 

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Press conference ifo Economic Forecast Spring 2022: Consequences of the Russian-Ukrainian War Slow the German Economy

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F&A Press conference ifo Economic Forecast Spring 2022: Consequences of the Russian-Ukrainian War Slow the German Economy

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Welcome Press conference ifo Economic Forecast Spring 2022: Consequences of the Russian-Ukrainian War Slow the German Economy

The outlook for the coming months is characterized by different economic drivers. On the one hand, the economy is likely to be supported by strong demand. Manufacturers’ order books are fuller than they have been for decades. Even if Russia disappears as a sales market, companies will be able to work off other orders, so the short-term impact of the sanctions is likely to remain low. There should also be a strong boost from the normalization of private consumption if the coronavirus situation improves in the course of the spring. In many contact-intensive services, sales are currently still significantly lower than before the outbreak of the coronavirus crisis, so there is considerable catch-up potential there. On the other hand, the consequences of the Russian-Ukrainian war are slowing the German economy. However, the scale of the impact depends to a large extent on the further development of commodity prices, economic sanctions against Russia, supply bottlenecks for raw materials and intermediate products, and economic uncertainty. To take account of these uncertainties about the further course of the conflict, two scenarios were considered for the forecast.

“The Russian onslaught is slowing the economy through a combination of significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products, and increased economic uncertainty.”

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

Two Scenarios

In the base scenario, commodity prices have already passed their peak and will gradually decline in the coming months. Here, the March 11 forward rates were used for the further course of market prices for crude oil, natural gas, and important food items. In line with these expectations, the supply bottlenecks and uncertainty are also only temporarily dampening the German economy. In the alternative scenario, by contrast, the situation will worsen in the coming months. Market prices for energy initially continue to rise and do not reach their peak until mid-year. Thereafter they start to fall, but remain noticeably above market expectations until the end of the forecast period. Until mid-year, high economic policy uncertainty and a further worsening of supply bottlenecks will also have a dampening effect.

Key Forecast Figures (Base Scenario)

  2020 2021 2022 2023
Gross domestic product (percentage change over previous year)  -4,6 2,9 3,1 3,3
Employment (1,000 persons) 44.898 44.920 45.479 45.654
Unemployment (1,000 persons) 2.695 2.613 2.266 2.293
Unemployment rate (in % of civilian labor force) 5,9 5,7 4,9 5,0
Consumer prices (percentage change over previous year) 0,5 3,1 5,1 1,8
General government financial balance 2020 2021 2022 2023
 - EUR billion -145,2 -132,5 -81,8 -44,2
 - in % of GDP -4,3 -3,7 -2,1 -1,1
Balance on current account 2020 2021 2022 2023
 - EUR billion 234,4 247,4 196,0 239,3
 - in % of GDP 7,0 6,9 5,1 5,9

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2022 to 2023: forecast by the ifo Institute.
© ifo Institute March 2022

Key Forecast Figures (Alternative Scenario)

  2020 2021 2022 2023
Gross domestic product (percentage change over previous year) -4,6 2,9 2,2 3,9
Employment (1,000 persons) 44.898 44.920

45.435

45.635
Unemployment (1,000 persons) 2.695 2.613 2.290 2.303
Unemployment rate (in % of civilian labor force) 5,9 5,7 5,0 5,0
Consumer prices (percentage change over previous year) 0,5 3,1 6,1 2,2
General government financial balance 2020 2021 2022 2023
- EUR billion - - - -
- in % of GDP - - - -
Balance on current account 2020 2021 2022 2023
- EUR billion 234,4 247,4 195,3 238,2
- in % of GDP 7,0 6,9 5,1 5,9

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2022 to 2023: forecast by the ifo Institute.
© ifo Institute March 2022

Rising Commodity Prices Drive Inflation Rate

As a result of higher commodity prices, inflation will be significantly higher this year at 5.1 percent (base scenario) and 6.1 percent (alternative scenario) than expected in December in the ifo Economic Forecast Winter 2021. In the coming year, the increase in consumer prices is expected to slow again, but at around 2 percent it will still be significantly higher than in the years before the coronavirus crisis. Another contributing factor is the fact that the upcoming collective bargaining negotiations can be expected to at least partially compensate for the inflation-related loss of purchasing power. Collectively agreed wages are therefore expected to increase comparatively strongly in the coming year at 3 percent.

In addition, the increases in the minimum wage in July and October are likely to primarily have a price effect, if we assume a similar transmission to that when it was introduced in 2015. They are likely to push up wage incomes by an additional 0.3 and 0.7 percent this year and next, respectively, which in turn should increase the inflation rate by 0.05 and 0.34 percentage points. By contrast, the abolition of the EEG surcharge, which is expected to reduce the price of electricity by around 10 percent from July 2022, will have a lowering effect on inflation. This will reduce the inflation rate by just under 0.2 percentage points this year and next year.

Private Consumption Remains the Mainstay of the Economy

Economic momentum will slow noticeably in both scenarios. Private consumption remains the mainstay of the German economy, with price-adjusted growth of 5.0 percent (base scenario) and 3.7 percent (alternative scenario) this year. However, high inflation is dampening private consumer spending. Industrial activity is also weakening noticeably, with a dampening effect particularly in the summer half-year. In the alternative scenario, industrial value added even declines in the second quarter of 2022. Moreover, spending on investment in equipment and other facilities and goods exports increase at a noticeably slower rate than expected in December.

Weaker Economy Leaves Its Mark on the Labor Market

Employment growth and the decline in unemployment will slow noticeably from the spring. However, as the recovery on the labor market in the winter half-year 2021/2022 was much more vigorous than expected in December, the number of people in work this year will be higher and the number of unemployed lower than expected in the ifo Economic Forecast Winter 2021.  

Unemployment will increase again slightly in the coming year. This reflects the fact that the present forecast takes into account the immigration of 1 million refugees from Ukraine. In the short term, this will primarily increase government transfer payments and public consumption. For 2023, meanwhile, it has been assumed that an additional 100,000 people will be available to the labor market, a significant proportion of whom will not find immediate employment.

Risks

This forecast is subject to a number of risks. There is a high degree of uncertainty above all with regard to the further course of the Russian-Ukrainian war. While the assumption of two scenarios has already covered a possible spectrum of consequences for the German economy, further crisis scenarios are conceivable. In particular, there could be an interruption in energy supplies from Russia, which would cause far greater economic damage in the short term.

In addition, new coronavirus infections have been rising strongly again since the beginning of March. While, as expected, most coronavirus restrictions are now being removed, it is still possible that consumers are acting cautiously due to the high level of infections and that consumption will take longer to return to normal than assumed in this forecast. However, private consumption could also recover more quickly if the surplus savings accumulated during the coronavirus crisis are spent, and by this further pushing demand.

Contact
Prof. Dr. Timo Wollmershäuser

Prof. Dr. Timo Wollmershäuser

Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts
Tel
+49(0)89/9224-1406
Fax
+49(0)89/907795-1406
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