Germany will enter recession next year, say leading economists

A new forecast from Germany’s major economic institutions predicts that the eurozone’s largest economy will plunge into recession next year, largely driven by a “drastic” rise in energy costs following Russia’s war in Ukraine.

The institutes said the country’s gross domestic product would grow 1.4 percent this year, contract 0.4 percent in 2023 and grow 1.9 percent in 2024.

They said inflation would rise to 8.8 percent next year, slightly higher than this year’s 8.4 percent level, though it would fall to 2.2 percent by 2024.

Economists blamed the deteriorating outlook on the decline in Russian gas exports to Europe, pushing fuel prices to record levels in the summer and increasing the prospect of gas shortages this winter.

While they don’t expect Germany to run out of gas, the institutes said the supply situation “remains extremely tight”, with gas prices likely to remain “well above pre-crisis levels”. “This will mean a permanent loss of wealth for Germany,” she added.

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The forecast was prepared by the Ifo Institute in Munich, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the Leibniz Institute for Economic Research.

It marks a radical overhaul of the institutes’ spring forecasts and underlines the bleak outlook for the economy and in particular for energy-intensive industries such as chemicals. Just five months ago, the institutes predicted growth of 2.7 percent this year and 3.1 percent in 2023.

“This revision mainly reflects the magnitude of the energy crisis,” they said in a joint statement, adding that economic output in 2022 and 2023 would be €160 billion lower than expected in the spring.

A sign of optimism was the German labor market, which they said had a “stabilizing effect”. Due to a shortage of skilled workers, companies were eager to retain existing staff, “which will only cause employment to fall slightly temporarily”.

Jacky

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