ifo Institute Expects Germany to Face Recession and Inflation
The ifo Institute has slashed its forecast for Germany’s economic growth. “We are heading into a winter recession,” says Timo Wollmershäuser, Head of Forecasts at ifo. In the coming year, the institute now expects economic output to shrink by 0.3 percent, and growth of only 1.6 percent for this year. Inflation is expected to average 8.1 percent this year and 9.3 percent next year. “The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus. We don’t expect a return to normal until 2024, with 1.8 percent growth and 2.4 percent inflation,” he says.
Compared with June, ifo has significantly lowered its growth forecast for 2023 by 4.0 percentage points and raised its inflation forecast sharply by 6.0 percentage points. “These are unusually large changes in such a short period of time,” Wollmershäuser continues. Energy suppliers will be markedly adjusting their electricity and gas prices in the light of high procurement costs, especially at the beginning of 2023. This will push the inflation rate up to around 11 percent in the first quarter. As a result, real household incomes will drop sharply and purchasing power decline noticeably. The government’s third relief package is likely to counteract this decline somewhat, but it will fall far short of offsetting it.
“The loss of purchasing power, as measured by the decline in real per capita wages this year and next by about 3 percent each, is higher than at any time since the current system of national accounts was introduced in 1970,” Wollmershäuser adds. Price increases will gradually weaken over the rest of the coming year. The ifo Institute assumes that there will be sufficient gas available in winter. Energy prices should therefore stop rising and should start falling again from spring 2023 at the latest.
The ifo Institute does not expect any severe effects on the labor market. The increase in employment will slow only temporarily. The rise in unemployment by a good 50,000 in the coming year is due mainly to the surge in the number of unemployed Ukrainian citizens in the summer of 2022, who will only gradually be integrated into the labor market.
Link
ifo Economic Forecast Autumn 2022: Inflation Stifles Private Consumption - German Economy Facing a Hard Winter
Gross domestic product will still increase by 1.6 percent this year and then contract by 0.3 percent next year. Inflation will average 8.1 percent this year and rise to 9.3 percent next year. It is expected to peak in the first quarter of 2023 at around 11 percent. In 2024, economic output is expected to increase by 1.8 percent and the inflation rate to fall to 2.4 percent.
