Friday, December 9, 2022

Latest Posts

Federal government autumn forecast: Germany will lag behind

Once a model student, today a problem child: the prospects for the German economy are slim. The Federal Republic of Germany is particularly affected by the energy crisis.

With German

The economy is down and the fund probably won’t arrive until next year: the federal government has lowered its economic forecasts due to the energy crisis. Federal Economics Minister Robert Habeck said it was a “significant economic collapse” when he presented his autumn forecast in Berlin on Wednesday.

According to forecasts, the government expects only small economic growth of 1.4% this year, in the next year the economy is likely to shrink by 0.4% and then slide into a recession. Growth of 2.3% is expected again for 2024.

The federal government presents its economic assessment twice a year. In April, the government still expected gross domestic product to rise by 2.2% this year and 2.5% next year.

Economics expert Michael Grömling from the Institute for German Economics (IW) on employers calls the current assessment surprising. “If it were to happen, it would still be a manageable recession,” he says in an interview with t-online. The same IW had provided a much more pessimistic forecast a few weeks ago.

However, it seems certain that Germany is heading for a recession. The federal government’s forecast is therefore in line with the very bad forecasts for the German economy. The International Monetary Fund (IMF) presented its prospects only on Tuesday. In it, the organization has again lowered its growth forecasts and Germany in particular is doing badly. Among the industrialized countries, the Federal Republic is even in the queue.

For 2022, the IMF still expects economic growth of 1.5% in Germany, which is 0.6 percentage points lower than the April forecast. According to these experts, the economy could contract in 2023 and slide into recession.

Various economic giants had previously warned of an impending recession, including Bundesbank chief Joachim Nagel. In t-online interviews, former economist Lars Feld and German ECB director Isabel Schnabel made similar statements. (Read the full interview here.)

One of the most important indicators for economic development is the inflation rate. Inflation has steadily increased since the Russian invasion of Ukraine in February and the subsequent suspension of Russian gas supplies. In September it reached 10 percent.

“We are currently experiencing a severe energy crisis, which is increasingly turning into an economic and social crisis,” said Habeck. The actions of Russian President Vladimir Putin are aimed precisely at this destabilization.

Replacing Russian gas with LNG, for example, is expensive. The uncertainties caused by unpredictable Russian equities are reflected in significant risk premia on the energy exchanges. This means that energy prices have become the main driver of inflation. Experts from the Ministry of Economy predict that inflation will be 8% overall in 2022 and 7% for next year.

This differs from their assessment of the joint diagnosis that leading German economic institutes published at the end of September. In it, they expected inflation of 8.8 percent over the next year.

Habeck justifies the differences with the defensive shield announced by the publication of the joint diagnosis. Consumers and companies will be supported with energy costs by spring 2024 with a maximum of 200 billion euros. The most important component is the expected brake on the price of gas. (Full details on the plans can be found here.)

The expert Grömling is skeptical that this will be successful. High energy prices have led to moderation in both private homes and industry. “I expect the braking effects to be significantly stronger than the federal government,” he says. Wages currently do not rise with rising prices and many households lack purchasing power.

No consolation, but at least one point of reference: Germany is far from alone. After two years of the crown pandemic and the resulting supply chain problems, the global economy has been shaken. Since February, the war in Ukraine has also had repercussions, especially on the energy markets.

But Germany has been particularly affected by the current crisis. Grömling also sees dependence on Russia as an important factor in the current situation. “Germany has a different position when it comes to energy,” said the expert. At the beginning of the year, about 55 percent of the gas came from Russia. This is not the case in countries like Spain or Portugal. And replacement is also much more difficult in Germany than in other European countries, as there are hardly any commodity deposits that have been developed.

This complicated procurement situation therefore affects a high percentage of the energy-intensive industry, continues Grömling. In Germany, industry accounts for a good 20 per cent of the economy, while in Italy and France it is only about ten per cent.

Furthermore, the economy is still weakened by the crown pandemic. “The sector has not yet been able to fully recover and has been slowed down again in the first round,” says Grömling. In the event of a gas or electricity shortage in the winter, this could further delay this recovery process.

According to the Federation of German Industries: “High energy prices and a sluggish economy are hitting the German economy with full force.” Rising costs and global pessimistic prospects pose a threat to investment and would therefore reduce growth potential.

Therefore they ask: “The federal government must now rapidly implement the proposed measures on the energy market to avoid a severe recession. Further steps must also be taken at the European level.”

All of this is bad news for consumers as well. The federal government is planning various relief measures, but not all will be written off. Even with the brake on the price of gas, it is still unclear how exactly it will be implemented.

For the year 2024, the government still expects price increases of 2.4%. While this would bring the inflation rate significantly closer to the European Central Bank’s target corridor of around 2%, it would not quite reach it.

But this is only a limited reason to be happy, as Grömling explains. After around eight percent this year and seven percent next year, it might not seem like much, but the price level continues to rise overall.

The ECB is therefore in a difficult situation. Early interest rate hikes have already made real estate financing significantly more expensive or even impossible for some home builders. Further rate hikes could exacerbate this problem, and this in a situation where the construction sector is already suffering and housing is urgently needed. At the same time, further increases are needed to “clearly put lasting effects in their place and prevent a wage-price spiral,” says Grömling.

Once a model student, today a problem child: the prospects for the German economy are slim. The Federal Republic of Germany is particularly affected by the energy crisis.

Latest Posts

Don't Miss