ifo Institute Cuts Its Growth Forecast for Germany to 2.2–3.1 Percent
The Russian attack on Ukraine is curtailing economic growth and accelerating inflation in Germany. “We now expect growth to reach no more than between 2.2 and 3.1 percent this year,” says Timo Wollmershäuser, Head of Forecasts at ifo. In December, the ifo Institute had forecast 3.7 percent growth for this year. Conversely, inflation is likely to rise faster than previously expected. ifo now expects it to reach between 5.1 and 6.1 percent, rather than the 3.3 percent it forecast back in December.
“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,” Wollmershäuser says. Overall, rising consumer prices will diminish purchasing power by around EUR 6 billion in the first quarter alone. “At the same time, full order books in manufacturing and the normalization of the coronavirus pandemic should give the economy a major boost.” This will cause growth to rise to between 3.3 and 3.9 percent next year, while inflation is expected to fall to around 2.0 percent.
Given the uncertainty of the situation, the ifo Institute calculated two forecasts based on different assumptions relating to factors such as how energy prices will develop. This year, energy prices are having a particular impact on private consumer spending, which might rise by between 3.7 and 5.0 percent. Companies’ investment in equipment will rise by between 0.0 and 3.9 percent. Unemployment, however, is unlikely to vary much, with ifo forecasting a level of 2.27 to 2.29 million people. Nevertheless, a significant increase in short-time work is likely in the pessimistic scenario.
The optimistic scenario assumes that the price of oil will fall gradually from its current level of EUR 101 per barrel to EUR 82 by the end of the year; and the price of natural gas will similarly fall from EUR 150 per megawatt-hour to EUR 108. In the pessimistic scenario, the price of oil rises to EUR 140 per barrel by May and only then falls back to EUR 122 by the end of the year. It expects the price of natural gas to climb to EUR 200 per megawatt-hour by May and then gradually fall to EUR 163.
