Russia’s Attack Subdues Germany’s Economic Recovery
Russia’s attack on Ukraine coupled with sharply rising energy prices is curbing economic recovery in Germany. The ifo Institute has reduced its forecast for economic growth this year to 2.5 percent, down from the 3.1 percent estimated in March. For next year, ifo now expects an acceleration to 3.7 percent. The institute predicts that inflation will rise to 6.8 percent and then drop down to 3.3 percent, although not until next year. “Economic output is currently still 1 percent below the pre-pandemic level of late 2019,” says Timo Wollmershäuser, Head of Forecasts at ifo. “But we’re expecting a gradual decrease in both commodity prices and material bottlenecks in the second half of the year.”
Wollmershäuser adds, “At the beginning of the year, high prices led to a loss of purchasing power among private households and in turn to a decline in goods consumption.” But thanks to a noticeable rise in spending on services, overall private consumption did not drop in the first quarter, but rather remained stable. This reflected the waning of the coronavirus wave and the normalization of private household spending. During the remainder of the year, this normalization is expected to continue and thus play a major role in the growth of the German economy.
For 2022, the ifo Institute predicts that unemployment will drop from 2.6 million people to 2.3 million, or from 5.7 percent to 5.0 percent. Next year, unemployment is expected to remain virtually constant. The hole in Germany’s budget is forecast to be cut in half this year, from EUR 131 billion to EUR 65 billion, and shrink to a mere EUR 12 billion next year. Much criticized internationally, the current account surplus (exports, imports, services, transfers) will drop to EUR 181 billion this year, down from EUR 265 billion in 2021. For 2023, the ifo Institute once again forecasts a surplus, this time of EUR 241 billion.
ifo Economic Forecast Summer 2022: Inflation, Supply Bottlenecks, and War Slow Economic Recovery in Germany
Since the beginning of the year, the German economy has been recovering from earlier waves of the coronavirus. The associated normalization of spending in the consumer-related service sectors is giving the economy a strong boost. However, high inflation, the war in Ukraine, and continuing supply bottlenecks are slowing the economic recovery in almost all sectors of the economy. GDP will grow by 2.5 percent in 2022 and 3.7 percent in 2023. This year the inflation rate is expected to reach 6.8 percent, its highest level since 1974. Consumer prices are also expected to rise at an above-average rate of 3.3 percent next year.
