Germany Experiences Income Losses despite GDP Growth
Germany’s gross domestic product (GDP) increased by 1.9 percent last year, which represents a much bigger rise than the long-term average. “However, the massive supply shocks that continue to plague the German economy have left their mark. Bottlenecks in energy, intermediate products, and the workforce – greatly exacerbated by the war in Ukraine – hampered production and drove up inflation. As a result, the country’s GDP growth for 2022 was only around half of the 3.7 percent that had been expected before the war began,” says Timo Wollmershäuser, Head of Forecasts at ifo.
Moreover, in times like these, economic performance measured in terms of GDP overestimates the development of an economy’s income and thus of its wealth. Since a large share of energy and intermediate products are sourced from abroad, and since their scarcity has pushed up import prices sharply, an increasing proportion of the income generated in Germany had to be used to pay for imports. According to estimates by the ifo Institute, this means that the remaining real income of German households and businesses shrunk by 0.7 percent last year. Prior to the outbreak of the war, an increase of 2.6 percent had been expected. “So not only did the current economic crisis restrict the growth of the economic pie – measured as GDP – but the rise in import prices meant that an increasingly large piece of this pie had to be served to other countries. Overall, Germany’s losses in real income and thus wealth for last year are estimated at almost EUR 110 billion,” Wollmershäuser says.
He expects 2023 to get off to a weak start. High inflation and rising interest rates are projected to cause private consumption and construction output to fall. By contrast, high order backlogs and easing bottlenecks for energy and intermediate products will boost industrial activity. Overall, economic output will likely contract slightly in the first quarter of 2023 and stagnate in the second quarter. The economy is not expected to recover until later in the year, as inflation rates will fall appreciably and incomes will rise strongly. All in all, total economic production is expected to stagnate in 2023.
