War in Ukraine

German companies are finding it difficult to replace imports from Russia, Ukraine, or Belarus, finds an ifo Institute survey. Only 13.8 percent of industrial companies with problems sourcing from these countries would be able to completely replace their sources of supply in the short term. For 43.4 percent, this is only partially possible. A further 16.3 percent answered that other sources of supply were not economically viable, and 13.8 percent stated that this was not possible at all.

According to the ifo Institute, Europe is in a quandary over whether to halt oil imports from Russia. “On the one hand, waiting with a decision would give the EU more time to better prepare by organizing alternative energy sources, reducing demand, and also optimizing the logistics of energy flows within the EU and across countries,” says ifo researcher Karen Pittel. “On the other hand, an oil embargo should not be postponed forever either, as more time would allow Russia to find other buyers while continuing to earn revenue from the EU.” A postponement would also reduce incentives in EU countries to prepare for a cutoff of Russian energy supplies. 

The leading economic research institutes expect gross domestic product to increase by 2.7 percent in the current year and by 3.1 percent in 2023. 

ifo researcher Karen Pittel describes a potential embargo on Russian hard coal as “unpleasant in the short term, but bearable” for the German economy. 

ifo President Clemens Fuest has called for the establishment of alternatives to Russian gas. “We need parallel structures in place to quickly and affordably suspend gas imports from Russia should future crises make this a necessity,” he writes in an article for ifo Schnelldienst.

To take account of the imponderables regarding the further course of the Russian-Ukrainian war, two scenarios were considered for the forecast. The base scenario assumes only a temporary increase in raw material prices, supply bottlenecks, and uncertainty. In the alternative scenario, the situation initially worsens before gradually easing from mid-year. Under these assumptions, GDP is expected to grow by only 3.1 percent (base scenario) and 2.2 percent (alternative scenario) this year, noticeably less than previously expected (3.7 percent). In the coming year, growth is then expected to be 3.3 percent (base scenario) and 3.9 percent (alternative scenario).

Clemens Fuest schreibt über die Vor- und Nachteile verschiedener Maßnahmen, die die Politik gegen die sprunghaft gestiegenen Energiepreise und zur Entlastung der Haushalte und Unternehmen ergreifen könnte. Er betont dabei, dass der Staat lediglich die Lasten umverteilen kann und nur dort eingreifen sollte, wo diese extrem hoch ausfallen oder nur schlecht getragen werden können.

The war in Ukraine is not only a military and geopolitical turning point. It is also changing the economic situation. This affects both the short-term economic trend and the medium-term prospects for growth and prosperity. The previously expected economic recovery will be weakened. There is a threat of stagflation, i.e., a combination of weak growth and high inflation. Monetary policy faces a dilemma: while interest rate hikes can curb inflation, they would further dampen growth. 

Der Präsident des ifo Instituts, Clemens Fuest, hat die von Bundeskanzler Scholz vorgeschlagene Erhöhung der Verteidigungsausgaben angesichts der aktuellen Sicherheitslage begrüßt. Nun stelle sich die Frage der Finanzierung. „Der Krieg in der Ukraine kann Überschreitungen der Schuldenbremse rechtfertigen. Allerdings dürften die zusätzlichen Ausgaben mittelfristig nicht komplett durch Schulden finanziert werden“, empfiehlt Fuest.

Sentiment in the German economy has improved appreciably. The ifo Business Climate Index rose to 98.9 points in February, up from 96.0 points (seasonally adjusted) in January. Companies were more satisfied with their current business. There was a marked improvement in expectations. The German economy is betting on an end to the coronavirus crisis. However, the escalation of the crisis engulfing Ukraine remains a risk factor.