In the midst of the recovery from the Corona crisis, Germany slipped back into recession. Inflation, driven up by energy prices, reduces incomes so people consume less. “The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump,” says Torsten Schmidt from the RWI Institute. According to the autumn forecast presented by four research institutes on Thursday, the German economy will shrink by 0.4 percent in 2023. The Institute for Macroeconomics (IMK) even expects minus one percent.
The institutes in the autumn forecast clearly state who is causing the economic slump. The economy started to deteriorate after the Russian invasion of Ukraine in February. Now that Russia has severely reduced its gas supplies, a significant part of the gas supply has been lost – and prices have skyrocketed. The high energy and food prices are taking away a lot of people’s purchasing power, analyzes RWI economics boss Torsten Schmidt: “Both low-income households and companies are therefore dependent on further support from politicians. However, care must be taken with companies that there are no permanent subsidies comes.”
Probably not lack of gas
After all, thanks to full storage tanks, a gas shortage is not to be expected in normal weather, according to the RWI, Ifo, IWH and IfW in their joint autumn forecast. However, the supply situation remains tense. In the medium term, gas prices are likely to be well above pre-crisis levels. This means a permanent loss of prosperity for Germany. According to this, economic output will be down by a total of 160 billion euros this year and next.
The researchers have therefore halved their forecast for this year and only expect economic growth of 1.4 percent. In 2023 the economy will shrink. Only in the following year should it expand again by almost two percent. The energy dip in economic output would thus be far less than that caused by the Corona slump in 2020. However, if the Ukraine war escalates, prices rise even more or a lack of gas shuts down factories, the economy will shrink more sharply next year.
Inflation even higher next year
Citizens will feel the price increases even more. “The massive increase in energy prices caused by the Russian war of aggression and the halt in gas supplies represents a price shock for the German economy that is unique in the post-war period,” says Sebastian Dullien, Director of the IMK Institute. The exchange price for energy has risen by 1000 percent since 2019. “For the most part, this has not yet reached consumers, as many households have longer-term contracts with their suppliers. The majority of the price increases will be felt in the coming winter months.” The federal government should relieve households and companies by effectively capping energy prices.
According to the autumn forecast, inflation next year will be even higher than this year at 8.8 percent. Price increases did not calm down again until 2024.
The high level of inflation means that many employees suffer inflation-adjusted wage cuts, according to Guido Baldi from the German Institute for Economic Research (DIW): “Households with low and middle incomes in particular are at risk of getting into financial difficulties. Many people and companies are looking ahead despite the decisions that have been made so far Relief packages from the federal government with great concerns for the future.” These fears put an additional brake on the propensity to consume and invest and threatened to exacerbate the recession.
Companies feel the crisis
Baldi estimates that the consequences of Vladimir Putin’s attack on Ukraine will cost Germany around five percent growth this year and next. The energy crisis is also developing into the main problem for German industry. “Price increases for energy on the one hand and uncertainty on the other are dampening sales and business expectations,” says DIW researcher Laura Pagenhardt.
Businesses also felt that the war in Ukraine, via energy shocks and other factors, is leading to significantly slower growth rates in most developed economies. The Chinese economy is also being slowed down by corona lockdowns and the smoldering real estate crisis. All of this is hampering the export-oriented German economy. Service providers such as retail or gastronomy, on the other hand, are suffering from reduced consumption.
At least no worries about the job
After all, most people don’t need to worry about losing their job right now. “The demand for new workers is likely to decrease in view of the economic downturn,” says RWI economics boss Torsten Schmidt. “Due to the shortage of skilled workers in many areas, however, companies will endeavor to keep the existing workforce”. The number of unemployed will continue to fall this year. In 2023 it will increase by 150,000 to 2.56 million. But that’s still fewer than last year.