New ifo economic forecast: Winter recession turns out to be mild

Status: 14.12.2022 10:10 a.m

The economy in Germany is still heading towards a winter recession. According to the researchers at the Munich ifo Institute, however, this could be weaker than initially feared.

The ifo Institute’s new economic forecast raises hopes that the winter recession in Germany will not be too severe. Accordingly, economic output will shrink by only 0.1 percent in 2023.

The researchers at the Munich institute are even more optimistic than the economists. In their annual report, the experts expected gross domestic product (GDP) to fall by 0.2 percent in the coming year.

After the winter, the economy picks up

The ifo Institute has also raised the forecast for the increase in economic output for the year 2022: to plus 1.8 percent from the previous plus 1.6 percent. “In particular, the third quarter of 2022 was much better than expected with an increase of 0.4 percent,” said Timo Wollmershäuser, head of ifo forecasts.

In the two quarters of the winter half-year 2022/23 the gross domestic product shrinks, but after that it goes up again. In 2024, the economy will then grow again at 1.6 percent.

Falling inflation rate due to electricity and gas price brakes

According to the Munich researchers, the electricity and gas price brake should slow down the increase in consumer prices somewhat: the inflation rate will fall to 6.4 percent in the coming year after 7.8 percent this year.

In the winter months in particular, the high inflation will cause the real income available to private households to fall and the economy to cool down as a result. It is not until the second half of the year that incomes are likely to rise faster than prices again, and private consumption should pick up speed as a result. For 2024, the institute expects a rate of 2.8 percent.

More short-time work in the winter months

Short-time work is likely to rise again temporarily in the winter months. At the same time, the increase in employment will largely come to a standstill and will only slowly get going again in the further forecast period. The unemployment rate is therefore likely to rise from 5.3 percent in the current year to 5.5 percent in 2023 and finally fall back to 5.3 percent in 2024.

However, all of these predictions are subject to one important condition: In all of their predictions, the Munich researchers assume that there will be no gas shortage in the next two years.

With the new economic forecast by the ifo Institute, there are increasing signs that Germany – Europe’s largest economy and until recently most dependent on Russian gas – is likely to get off lightly economically. Some leading economic indicators, such as the rising purchasing manager indices for the private sector, had recently fueled hope in this regard.

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