Crisis follows crisis

Instead of climate protection and Corona, war and energy shortages are now dominating the headlines – and with them government action. Concerns about “stagflation” are spreading.

>> Read here: Ifo: Companies want to raise construction prices across the board due to bottlenecks.

Economic forecasts are based on the analysis of past data and the statements derived from this for the future. However, for a war in Europe and for a severe energy price shock, there is actually no historical data, which means that all forecasts are subject to a high degree of uncertainty. “Nassim Taleb came up with the ‘black swan’ metaphor for the unpredictable consequences of completely unexpected events – the war in Europe is a black swan,” stressed Bert Rürup, President of the Handelsblatt Research Institute (HRI), on the occasion of the HRI forecast. “Proven past-future symmetries and behavioral patterns no longer apply. There is therefore no model that can approximately depict the possible consequences of an escalation of the current situation.”

For the same reason, the various economic forecasts diverged extremely widely even after the outbreak of the pandemic – and most of the forecasts later turned out to be wrong. Some risks have been overestimated, while others, such as the lasting impact on global supply chains, have been underestimated. Overall, the economic pessimism in spring 2020 was far too great. Despite many imponderables, German industry has always proved to be very flexible. The companies managed to adapt supply chains and sales markets to the changed framework conditions, so that disruptions were mostly only temporary.

The economy will also cope with the war crisis

The HRI does not assume that the Russian conflict and the associated sanctions will end quickly. At the same time, we expect that the German economy will also be able to cope with this crisis, even if some adjustment pains are inevitable. It is conceivable that there will be prioritization of the gas supply in the coming autumn and winter, so that the production of individual companies or sectors will have to be interrupted.

Nevertheless, the macroeconomic consequences are likely to be far less than those caused by the corona pandemic. Although we are noticeably reducing our economic expectations for the current year, we do not expect a decline in economic output like in the first Corona year 2020.

The German economy is expected to grow by 2.7 percent this year and by two percent in 2023. The pre-corona level will be almost reached this year. The German economy then grows by around 0.3 percent per quarter in line with its trend. The summer boom that many other institutes were expecting until recently will not happen. “Thus, the German economy will probably lack three years of economic growth in the long term,” said HRI President Rürup.

This means that the gross domestic product will be around 300 billion euros lower in the long run than it would have been without the pandemic. Added to this were the losses resulting from the Ukraine war and the sanctions against Russia, emphasized Rürup. “Today, Germany is significantly poorer compared to the expectations of 2019.”

Private consumption will increase again

For the forthcoming spring and summer, we expect an increase in private consumption, as almost all corona protection measures are to be lifted shortly. Many consumers have large savings accumulated during the pandemic lockdown. This expansion in private consumption is being dampened by the sharp rise in energy prices, which are noticeably reducing consumers’ real purchasing power.

>> Read here: “Heavy headwind”: Institute for the World Economy cuts growth forecast in half

Some of the pent-up savings may be used to pay high energy bills and is therefore not available for other consumption purposes. The bottom line is that domestic consumers are likely to consume less in real terms than initially assumed. However, the influx of refugees from Ukraine is likely to increase domestic consumption noticeably, especially if the war lasts longer and the refugees have to stay longer in Germany. Overall, private consumption should therefore grow by 3.5 percent in real terms this year and slow down to 1.5 percent in 2023. That is why private consumption will not reach the pre-corona level again in 2023.

State consumption is completely different: In the course of the pandemic, the public sector spent a lot of money on infection protection and to stabilize the economy. Instead of the usual annual growth of around one to 1.5 percent, government consumption grew by more than three percent in 2019, 2020 and 2021. In the current year, state consumption is continuing to expand, although the corona measures are being noticeably scaled back. However, this decline is offset by higher spending related to the Ukraine war. On the one hand, the state is expanding its transfers considerably in order to compensate at least those in need for the high energy costs. On the other hand, there are high government expenditures for looking after the refugees.

For investors, uncertainty is poison. In the event of external macroeconomic shocks, waiting is the order of the day for many companies, so some investment projects are being postponed. At the same time, however, the energy price shock shows that there is no alternative to the desired decarbonization – and that extensive investments are therefore needed. Gross fixed capital formation should therefore increase moderately this year and next. In view of the sharp slump in 2020, the pre-crisis level will still not be reached.

The construction industry, on the other hand, has overcome its weak phase and will grow properly again in 2022. In addition to the shortage of skilled workers, the drastically rising material prices are dampening even stronger expansion. The demand for private and government construction services remains very high, not least because large parts of the infrastructure and the building stock are in need of renovation.

The federal government has announced high state investments in armaments, energy infrastructure and climate protection. Of course, it must be taken into account that the state’s share of total investment is comparatively small at just under twelve percent. In addition, the very high amounts announced will be spread over several years, so that the macroeconomic effects should remain manageable.

In the future, the flow of goods will only be diverted

World trade, the world economy and thus German foreign trade will be influenced in the near future by two global events in particular. The war in Ukraine and the sanctions against Russia are slowing down the global flow of goods in the short term; in the future, however, these will primarily be diverted. Russia will remain permanently isolated. It is also uncertain whether China will stick to its zero-Covid strategy and whether there will be repeated port closures and local lockdowns in the world’s second largest economy as the year progresses.

This would continue to keep the global supply chains under stress and repeatedly cause temporary production outages in Germany as well. Exports and imports will therefore continue to grow, albeit more slowly than in the previous year. At 0.1 and 0.3 percentage points, foreign trade will only make a small contribution to economic growth this year and next.

The increase in the price of energy will affect almost all products in the form of higher production and transport costs. It is conceivable that the high oil and coal prices will stimulate the world production of fossil fuels or that the federal government will counteract the price surge with administrative rules. Nonetheless, annual average inflation is likely to be 5.5 percent, a value that was last exceeded in 1981 during the First Gulf War.

In 2023, price levels will continue to rise as modest second-round effects through higher wage deals are likely and it also takes a while for higher commodity prices to feed through to consumer prices through supply chains. We therefore expect 3.7 percent inflation for 2023. The inflation rate of 2.1 percent forecast by the ECB for the entire euro zone in 2023 is probably far too low – and is apparently characterized more by hope than by facts.

Stable labor market

The German labor market has held up well during the pandemic, which is also due to generous short-time work regulations. In February 2022, unemployment was almost back to pre-Corona levels. The number of vacancies reached an all-time high in the final quarter of 2021. Large parts of the German economy are suffering from a shortage of skilled workers, which will become even worse in the coming years due to demographic factors. This is probably one of the reasons why many companies did not lay off traditional and qualified staff during the corona crisis.

On average this year, unemployment will hit a record low of 2.18 million in reunified Germany and will continue to fall noticeably in 2023. In the second half of 2023, fewer than two million people will be registered as unemployed. Employment will then peak at 45.6 million people in employment, before starting to gradually decline from the middle of this decade, because the baby boomer cohorts are gradually retiring and have to be replaced by significantly weaker cohorts in workshops and offices.

“Since this development will continue, growth in overall economic output will no longer be a matter of course from the 2030s onwards,” warns HRI President Rürup. “Even without new macroeconomic shocks.”

More: The post-corona boom is cancelled: This is how the German economy will develop