It was a year of extremes. After Russia invaded Ukraine and prices continued to climb, some predicted a really big crash: the German economy would collapse dramatically in 2022. But the balance of the extreme year is very different. So what’s happening this year?
The German economy grew by 1.9 percent in 2022, the Federal Statistical Office reported on Friday. This is the fifth-highest growth in the past ten years. And that despite the war, in the course of which Russia stopped its gas supplies and thus largely caused the highest inflation in decades. “None of the bad forecasts came true,” says Veronika Grimm, an economist at the University of Erlangen. Because the Germans consumed more than expected despite the high prices. The supply chains worked better again after major problems in 2021. “And the economy has reacted to the reduction in Russian gas supplies,” says Grimm. “It saved gas and replaced energy-intensive production with imports.”
So the greatest of all risks has not materialized: that Germany will run out of gas, the citizens will freeze and companies will shut down factories across the board. Contrary to what was feared, the natural gas storage facilities are full to the brim. “For this winter, the danger of a lack of gas should be averted,” believes energy researcher Grimm, who is part of the government’s expert council, the economic experts.
The crisis cost every citizen 1400 euros
Almost two percent economic growth: that is a good value in a long-term comparison. “But at second glance it’s a bad result,” says Timo Wollmershäuser from the Munich Ifo Institute. 2022 should be the year of rapid recovery from the Corona crash. Economic researchers expected almost four percent more gross domestic product. Until the war came and prices shot up, for energy but also for food. This double shock cut growth in half. He made Germany pay more to import energy and other things. Wollmershäuser makes a bitter calculation: “The crisis caused real income and thus prosperity of around 110 billion euros to be lost – almost 1,400 euros per citizen. That’s how much purchasing power they lost”.
Without economic growth, citizens would have lost even more. And that growth comes as a surprise given Europe’s first major land war since 1945 and record inflation. “Everyone thought that the households were running out of air because of the high prices and they were consuming less. But things went surprisingly well, in the catering trade, when shopping. In December, car sales went through the roof,” reports the Ifo Institute’s head of economic activity. Most Germans would not have saved out of fear. They would have cleared their accounts more than expected to consume.
This also bodes well for this year. In the meantime, the federal government has massively relieved the citizens of the high energy prices. In December, she took over the down payment to the utility. And now the electricity and gas price brakes are taking effect, taking a large part of the additional costs away from consumers. In addition, there are reliefs due to the shift in the key tax values. And one-off payments and wage increases that unions have pushed through in major industries like metal and chemicals.
All this ensures that people have more money at their disposal. So they should spend more. The rate of inflation will remain high for the time being, but will be pushed down significantly by the brakes on energy prices alone. “The gas and electricity price brake means that inflation is reduced and the economy is less dampened,” analyzes Grimm.
There will only be growth again in 2024
Overall, inflationary pressures are slowly diminishing. Gradually the wage increases take effect. From the middle of the year, incomes are likely to rise faster than prices. Then the economy picks up speed again because inflation bothers people less and they spend even more.
Researchers expect that this year will not be enough for economic growth like 2022 due to the persistently high inflation. There will only be growth again in 2024, a good one to two percent. This year the economy is stagnating at plus minus zero. Everything moves in the boring middle field, in the yes, which is immediately followed by a but. The industry is pleased that gas prices are already falling and is living on high order backlogs, but is receiving few new orders. The construction industry supported the economy for a long time, but is now weakening significantly. Because the European Central Bank is raising interest rates because of inflation, construction has become more expensive. Internationally there is little impetus. The International Monetary Fund is leaving its growth forecast for the global economy in 2023 at 2.7 percent for the time being.
What the stagnation of the German economy is not: The deep slump that some forecasters had also predicted for 2023. Stagnation means that no additional prosperity is created for the citizens – no more, but also no less.
Economy calls for three years longer nuclear lifetimes
But are there any risks that things will get worse this year? Yes, because there is a risk of a gas shortage again next winter. It might be difficult when it gets very cold. Or when the nuclear reactors in France have to be shut down again due to drought. Or if China consumes significantly more gas, since the economy there is starting up again as a result of the easing.
That is why Germany must continue to save gas, demands energy researcher Grimm. The federal government must communicate more clearly what savings incentives the gas price brake offers. “Only if this happens immediately do the citizens have the time to react. They can insulate houses or replace heating systems – but only with enough advance notice”.
And then the economy makes another suggestion that could further fuel the discussions in the traffic light coalition: “It would be right not to shut down the nuclear power plants in April, but to let them run for another three years. This would reduce the electricity price in Germany and the Neighboring countries are significantly lower, emissions from coal-fired power generation would be reduced and gas saved.” Just this week, the FDP called for a debate on extending the nuclear lifetime – which Green Economics Minister Robert Habeck immediately rejected.