Twice a year, Germany’s five leading economic institutes jointly present a forecast. This fall they have discovered that the situation has deteriorated: while the other major economies are growing, the German economy will shrink by 0.6 percent this year, they predict. This means that their forecast is almost one percent worse than in the spring. A decline in growth ultimately means less income for citizens.
“The most important reason for the more negative forecast is that industry and private consumption are recovering more slowly than we expected in the spring,” says Oliver Holtemöller, Vice President of the Halle Institute for Economic Research (IWH). The Russian attack on Ukraine caused prices for energy and food in particular to rise sharply. The German economy initially coped relatively well with the surge in inflation. The gross domestic product increased by 1.8 percent in 2022. However, the economy has been in a downturn for a year.
The strongest wave of inflation in decades is leaving citizens with less money in their wallets. The reduced purchasing power leads to them reducing their consumption. In order to slow down the wave of inflation, the European Central Bank has also significantly raised its key interest rates. This particularly affects the construction industry.
The mood in companies as a whole has deteriorated again recently. Energy-intensive companies such as chemicals produce significantly less because of higher energy prices. The export-dependent German industry is particularly suffering from a weak global economy, in which higher key interest rates are making themselves felt in many regions. The economic institutes expect production to fall noticeably again in the third quarter from July to October.
The gloomy situation is also noticeable on the labor market. The institutes expect almost 2.6 million unemployed this year, almost 200,000 more than in 2022.
Consumer purchasing power is returning
But researchers are slowly seeing hope on the horizon. Energy prices have fallen below their peak values again. Exporters sometimes manage to pass on their higher costs. And above all, consumers’ purchasing power is returning. The unions have sometimes pushed through double-digit wage increases to mitigate the inflation shock. This means that consumption is likely to increase again and the downturn will end by the end of the year, according to the institutes Ifo, DIW, RWI, IfW and IWH.
In their joint forecast, they expect significant growth of 1.3 percent for next year. That is slightly less than expected in the spring. But unlike this year, there is no strong downward correction. A decline in the inflation rate should also contribute to the recovery: after 6.1 percent inflation this year, the researchers expect inflation to only reach 2.6 percent in 2024.