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All the same, the three institutes consider it possible for the economy to normalize in the coming year, both in terms of growth and inflation. Ifo raised the growth forecast for 2023 slightly to 1.7 percent. The IfW Kiel expects growth of 1.4 percent for the coming year.
“Inflation has become the most important driver of the economy,” said Ifo economic chief Timo Wollmershäuser. For this year he expects an average inflation of 6.2 percent. However, it will fall significantly over the course of the year and will again be close to the European Central Bank’s target value of 2.2 in the coming year. “Inflation has peaked,” said Wollmershäuser. The IfW Kiel is also optimistic that inflation will fall again to almost two percent in the coming year.
Economy in Germany: Inflation decides
Wollmershäuser expects that noticeable tariff increases over the course of the year will support demand and thus the economy. “From the middle of the year at the latest, rising real wages will support the domestic economy,” he said.
The Ifo is more optimistic about the state budget than three months ago. It will be in the red in the current and next year with 1.3 and 0.3 percent of economic output respectively. In December, the forecast was still 2.6 and 1.2 percent. Among other things, Ifo expects that the subsidies from the gas and electricity price brake will be 35 billion euros lower than Ifo forecast in autumn due to lower energy prices.
The IfW Kiel said that the prospects for the German economy had brightened slightly. Researchers expect gross domestic product to grow by 0.5 percent this year. That is 0.2 percentage points more than in the Kiel winter forecast. Unlike the Ifo, the IfW expects a moderate increase in GDP of a good 0.2 percent in the first quarter of 2023. According to this forecast, Germany would be spared a technical recession – i.e. a decline in economic output for two consecutive quarters.
“The recently significant decline in gas prices initially stimulated the economy in this country only slightly,” estimates IfW Economic Director Stefan Kooths. Above all, the state budget will be relieved, which will have to use less money for the energy price brakes.
According to the IfW forecast, the price increase is still stubborn this year. The high prices depressed the real wage costs of many companies and let public budgets bubble up. In Kooth’s view, the wage increases of a good five percent this year and almost six percent next year should not have any “second-round effects” on inflation. The Ifo Institute also sees no danger of a “price-wage spiral”.
That too Institute for Economic Research Halle (IWH) expects the economy to be weak in 2023. The economists cited high inflation, higher real interest rates and declining real incomes as the main reasons for the stagnation.
The key interest rate hikes that were to be expected due to inflation slowed demand, for example in the construction sector. It is positive that many companies are expanding their employment. Energy prices have also recently fallen drastically after record levels in late summer. Nevertheless, the costs for energy are still significantly higher than in the summer of 2021. “In the manufacturing industry, some energy-intensive goods are currently not being produced in Germany due to a lack of profitability, but are being imported,” said IWH economist Oliver Holtemöller. On the other hand, Wollmershäuser from the Ifo Institute expects production to increase in the manufacturing sector. It is an opportunity for the economy that production in the energy-intensive areas of the German economy will normalize again.
Positive data also came from industry across the euro zone. In January, production rose significantly more than expected compared to December, at 0.7 percent. Compared to the previous year, production was 0.9 percent higher. This was also above expectations.
The economy in Germany is treading water. A deep recession is unlikely. However, the German economy is unlikely to grow much this year.
With slight deviations, these forecasts were made by the three economic institutes, the Munich-based Ifo Institute, the IfW Kiel and the IW Halle.
An important key to further development lies in inflation. The researchers expect a normalization in the coming year if the ECB raises interest rates further.
The economy in Germany is treading water. The German economy is threatened with stagnation just above or below the zero line this year. This emerges from the spring forecasts of three important German economic institutes.
The Munich-based Ifo Institute continues to expect gross domestic product to fall by 0.1 percent this year. The Kiel Institute for Economic Research (IfW Kiel) raised its growth forecast slightly to 0.5 percent. The Institute for Economic Research in Halle believes the German economy is capable of growth of 0.4%. only that Ifo-Institute currently anticipates a recession in Germany, as GDP, after the decline in the fourth quarter of 2022, will also shrink at the beginning of 2023 and thus for two consecutive quarters.
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All the same, the three institutes consider it possible for the economy to normalize in the coming year, both in terms of growth and inflation. Ifo raised the growth forecast for 2023 slightly to 1.7 percent. The IfW Kiel expects growth of 1.4 percent for the coming year.
“Inflation has become the most important driver of the economy,” said Ifo economic chief Timo Wollmershäuser. For this year he expects an average inflation of 6.2 percent. However, it will fall significantly over the course of the year and will again be close to the European Central Bank’s target value of 2.2 in the coming year. “Inflation has peaked,” said Wollmershäuser. The IfW Kiel is also optimistic that inflation will fall again to almost two percent in the coming year.
Economy in Germany: Inflation decides
Wollmershäuser expects that noticeable tariff increases over the course of the year will support demand and thus the economy. “From the middle of the year at the latest, rising real wages will support the domestic economy,” he said.
The Ifo is more optimistic about the state budget than three months ago. It will be in the red in the current and next year with 1.3 and 0.3 percent of economic output respectively. In December, the forecast was still 2.6 and 1.2 percent. Among other things, Ifo expects that the subsidies from the gas and electricity price brake will be 35 billion euros lower than Ifo forecast in autumn due to lower energy prices.
The IfW Kiel said that the prospects for the German economy had brightened slightly. Researchers expect gross domestic product to grow by 0.5 percent this year. That is 0.2 percentage points more than in the Kiel winter forecast. Unlike the Ifo, the IfW expects a moderate increase in GDP of a good 0.2 percent in the first quarter of 2023. According to this forecast, Germany would be spared a technical recession – i.e. a decline in economic output for two consecutive quarters.
“The recently significant decline in gas prices initially stimulated the economy in this country only slightly,” estimates IfW Economic Director Stefan Kooths. Above all, the state budget will be relieved, which will have to use less money for the energy price brakes.
According to the IfW forecast, the price increase is still stubborn this year. The high prices depressed the real wage costs of many companies and let public budgets bubble up. In Kooth’s view, the wage increases of a good five percent this year and almost six percent next year should not have any “second-round effects” on inflation. The Ifo Institute also sees no danger of a “price-wage spiral”.
That too Institute for Economic Research Halle (IWH) expects the economy to be weak in 2023. The economists cited high inflation, higher real interest rates and declining real incomes as the main reasons for the stagnation.
The key interest rate hikes that were to be expected due to inflation slowed demand, for example in the construction sector. It is positive that many companies are expanding their employment. Energy prices have also recently fallen drastically after record levels in late summer. Nevertheless, the costs for energy are still significantly higher than in the summer of 2021. “In the manufacturing industry, some energy-intensive goods are currently not being produced in Germany due to a lack of profitability, but are being imported,” said IWH economist Oliver Holtemöller. On the other hand, Wollmershäuser from the Ifo Institute expects production to increase in the manufacturing sector. It is an opportunity for the economy that production in the energy-intensive areas of the German economy will normalize again.
Positive data also came from industry across the euro zone. In January, production rose significantly more than expected compared to December, at 0.7 percent. Compared to the previous year, production was 0.9 percent higher. This was also above expectations.