German economy will probably fall by 0.2 percent

The economy is likely to stabilize from the spring, but the HRI is not expecting a real upswing, as some leading indicators seem to be signaling. At the end of this year, economic output will be roughly as high as at the beginning of the recession, i.e. at the end of the third quarter of 2022 – and thus at the level before the outbreak of the corona pandemic at the beginning of 2020.

“Inflation, the Ukraine war and Corona have made dependent employees and pension recipients in particular poorer,” says HRI President Bert Rürup. “Factually, four years of growth are missing. There has never been such a long phase of stagnation in post-war Germany. Contrary to what the government claims, the German economy has by no means come through the double crisis well in economic terms.”

For 2024, the HRI sees at most a slight recovery – the economy is likely to grow by 0.9 percent. This would put Germany at the bottom of the euro area economies. According to EU forecasts, Spain’s economy will grow by two percent in 2024, France’s by 1.4 percent and Italy’s by 1.0 percent. For the euro zone as a whole, the EU Commission expects growth of 1.5 percent for 2024, after 0.9 percent growth in the current year.

Inflation and energy crisis: price level rises by 20 percent

According to the HRI, Germany, with its large share of industry in gross value added, is suffering particularly badly from the energy price increases resulting from the Ukraine war and the sanctions against Russia. All industries are affected by higher transport and manufacturing costs. The result: very energy-intensive parts of production have become unprofitable and are likely to be relocated abroad.

Apparently many manufacturers and dealers use this and improve their margins under the pretext of rising price levels. Calculations by the Ifo Institute show that numerous companies increased their sales prices in the fourth quarter of 2022 more than the development of purchase prices had indicated. Above all in trade, hospitality and the transport sector as well as in the construction industry, it was possible to increase profit margins. In this way, imported inflation – caused by energy prices, for example – becomes home-made.

High real wage losses for workers

Therefore, the HRI expects inflation to decline only slowly. After 6.9 percent last year, consumer prices are likely to increase by 5.6 percent in the current year and by 3.2 percent in 2024. Within four years, the price level will then have risen by around 20 percent – previously it had taken 15 years for prices to rise by a similar amount.

Despite high wage demands from some trade unions, the chances for consumers to be able to quickly compensate for the real wage losses of the past three years are slim. Most consumers should be happy at the end of the year if wage developments can at least keep pace with inflation in the current year.

After all, many a long-term collective agreement dates back to times when inflation was low. For example, workers in the printing industry will get a 1.5 percent increase in wages from May, newspaper editors will get a 2 percent increase from June, and in the insurance industry there will be a 2 percent increase from September.

>> Read here: Why the upswing in Germany is not coming this year

In addition, most state aid consisted of one-off payments or temporary tax-financed price reductions. These have now largely been paid out – and spent. Many consumers are only just beginning to realize the full extent of their loss of real income.

In view of the planned energy turnaround, many consumers have legitimate concerns that housing costs will continue to rise – and that consumption will therefore have to be reduced elsewhere.

Private consumption is therefore likely to shrink slightly this year by 0.1 percent compared to the previous year. The HRI expects growth of 0.6 percent for 2024, but the level of consumption would still be below the pre-Corona level in 2019.

ECB: Turnaround in interest rates takes effect with a delay

In the summer, the ECB began to increase its key interest rates in large steps. The macroeconomic consequences of this turnaround in interest rates are only gradually becoming apparent. It usually takes three to six quarters before a braking effect occurs.

The building is always the first to react. After construction investments had already shrunk by 1.7 percent in 2022, according to the HRI, there is a risk of a further decline of 4.8 percent in the current year. This would be the strongest slump in over 20 years.

In the coming year, construction investments are likely to fall further – within three years the minus will be almost eight percent. According to the HRI, the federal government’s goal of ensuring that 400,000 new homes are completed each year will not be met.

The about-face by the ECB will also affect other areas of the economy. Interest rates for overdraft and consumer credit are rising sharply, which restricts consumption options. In addition, the interest burden on the state is skyrocketing, which is eating up the scope for further relief.

>> Read here: Why banks are currently rejecting many real estate loans

In addition, credit-financed investments by companies and their interest payments on existing debts are becoming more expensive. In autumn 2022, the 150 listed companies in the Dax, MDax and SDax had piled up a good 530 billion euros in net financial debt – so every percentage point higher average interest costs a good five billion euros.

National debt is increasing rapidly

The aid and rescue packages of the past three years have pushed up the state’s debt. According to the Federal Statistical Office, the debts in the financial statistics of the federal, state and local governments totaled 2.37 trillion euros at the end of 2022 – before the Corona outbreak it was 1.9 trillion.

In addition, the turnaround in interest rates will hit the federal budget hard, as the federal government is currently taking out massive amounts of new loans. This year, the federal government will have to spend almost 40 billion euros on its interest payments, in 2021 it was 3.85 billion euros.

>> Read here: How companies drive inflation

These burdens weaken the resilience of the state budget, making it more vulnerable to crises. Both the financing of further aid measures in the event of new external shocks and the urgently needed growth policy are becoming more difficult.

“The fact that the previous federal governments failed to strengthen the forces of growth is now taking its toll,” emphasizes HRI President Rürup. In an international comparison, the corporate taxes that are the responsibility of politicians are very high, and then there are the high energy prices.

In addition, the USA attracted investors with high subsidies. “All of this means that many important investment decisions are currently being made against Germany as a business location. Unless the government takes courageous countermeasures, the current economic downturn threatens to become a locational disadvantage and a real brake on growth for the country.”

More: Leading institutes no longer expect a recession in 2023.