Economic forecast lowered: Economic experts warn of Russia risk

The German Council of Economic Experts has drastically reduced its economic forecast for this year. The economic experts warn that Germany must arm itself against a freeze on Russian energy supplies.

According to the German Council of Economic Experts, the Russian war of aggression against Ukraine has drastically worsened the general economic conditions for the Federal Republic. The experts, colloquially referred to as “economic wise men”, have therefore greatly reduced their economic forecast.

For the current year, the economists only expect growth in gross domestic product (GDP) of 1.8 percent, in 2023 GDP should increase by 3.6 percent. For comparison: In their last economic estimate in November, the economic experts had forecast growth of 4.6 percent for 2022.

Germany must end its dependency on Russia

The Council of Experts, which advises the federal government on economic policy issues, also issued a clear warning with regard to the Federal Republic’s great dependence on Russian energy supplies. Stopping these deliveries carries the risk that the German economy could slide into a deeper recession and inflation will increase even more, warned Monika Schnitzer, a member of the German Council of Economic Experts.

“Germany should immediately set all the levers in motion to arm itself against a possible freeze on Russian energy supplies and at the same time quickly end its dependence on these imports,” said Volker Wieland, a member of the German Council of Economic Experts. In this way, energy security in Germany can be increased in the long term – even if this means that energy prices remain elevated for some time.

Inflation: The risk of a wage-price spiral is increasing

Due to the sharp rise in energy prices, the German Council of Experts also expects significantly higher inflation rates in the Federal Republic: the economists are now expecting 6.1 percent for 2022 and 3.4 percent for 2023. The economists had previously estimated inflation for the current year at 2.6 percent.

Veronika Grimm, member of the Advisory Council, emphasized that high inflation and rising inflation expectations are also likely to affect wage negotiations. “The momentum for wage demands is likely to increase from the second half of 2022. This increases the risk of a wage-price spiral.”

For the year 2022, the German Council of Economic Experts expects wages actually paid by companies (actual wages) to grow by 2.5 percent. In the coming year, wages are likely to rise by 4.4 percent.

Economy more pessimistic than IfW and ifo

Recently, several institutes had revised their forecasts for inflation upwards and downwards for GDP in view of delivery bottlenecks and rising energy prices.

However, the experts’ forecasts were not quite as pessimistic as those of the German Council of Economic Experts. For example, the Kiel Institute for the World Economy (IfW) expects GDP growth of 2.1 percent for 2022. The Munich ifo Institute expects growth of between 2.2 and 3.1 percent.