ifo Economic Forecast for Eastern Germany and Saxony: Robust Despite Turbulence
The outlook for the global economy has deteriorated significantly since December 2021. Nevertheless, the economy in eastern Germany and Saxony is likely to continue expanding. In the current year, economic output in those regions will grow by 2.9 and 1.8 percent respectively (Germany: 2.5 percent). Assuming that it is still possible to avoid an undersupply of natural gas this coming winter, economic output in eastern Germany is likely to be 3.5 percent higher year over year in 2023; in Saxony, gross domestic product will increase by 3.3 percent (Germany: 3.7 percent).
“This year is marked by a recovery in consumer-related services following the coronavirus crisis. High, in some cases double-digit, growth is expected in hospitality and tourism. “The areas benefiting most from this are Berlin and the touristic regions of eastern Germany,” says economic expert Joachim Ragnitz from the ifo Institute’s Dresden Branch. However, high energy prices resulting from the Ukraine war as well as ongoing disruptions in global supply chains are having a negative impact in sectors of the economy such as manufacturing and construction, thus slowing GDP growth.
“We expect the current pressures on economic activity to ease over the remainder of the forecast period,” Ragnitz says. The inflation rate is likely to decline again in the coming months, also in response to the interest rate hikes announced by the European Central Bank. High energy prices are also expected to fall over the forecast period as Europe increasingly loses its dependence on Russian energy supplies. The protracted pandemic-related lockdown in Shanghai has been lifted again, so that purchases of intermediate goods from China should also normalize in the future. Based on these assumptions, manufacturing should be able to grow strongly again next year, with Saxony benefiting in particular. For the service sector, the economic situation is expected to normalize.
Despite a difficult starting point, the labor market is expected to continue to recover, with new hires especially in hospitality and tourism. Growing shortages on the labor market mean that even the substantial increase in the minimum wage will not have a serious negative effect on labor demand. As a consequence, the eastern German states can expect a 1.2 percent increase in the number of people in employment this year (Saxony: 0.7 percent). Next year, however, the increase is likely to be only 0.6 percent (Saxony: 0.3 percent), not least given the shortage of labor.
This economic forecast was completed before June 15. The downside risks to further economic development have increased significantly since then, in particular due to the curtailment of gas supplies from Russia. As a result, there is a risk that gas supplies to manufacturing will have to be rationed at the end of the next heating season in the spring of 2023. This would lead to sharp declines in production, which would then spill over into other sectors of the economy. From today’s perspective, however, it is essentially impossible to quantify these effects.
