Berlin Robert Habeck swears by unity. The Federal Minister of Economics spoke of a “great joint effort” when presenting the Federal Government’s new economic forecast on Wednesday. Habeck is now assuming slight growth in the German economy of 0.4 percent for 2023. That’s not much, but still a lot better than last fall’s miserable forecasts. In October, Habeck had still expected the economy to contract by 0.4 percent.
In the meantime, there should not even be a so-called technical recession, i.e. two consecutive quarters with declining economic output. After a minus of 0.4 percent in the fourth quarter of 2022, the Bundesbank recently wrote: “Economic output probably rose again in the first quarter.”
And as far as 2024 is concerned, the federal government expects gross domestic product (GDP) to grow by 1.6 percent. Habeck thus confirmed the preliminary forecast figures that the Handelsblatt had already reported on last Thursday.
The Vice Chancellor seemed almost euphoric, speaking of a “really remarkable” improvement in the economic situation. “This is a clear exclamation mark compared to what one should have feared in the past.” According to Habeck, this was due to the economy, which had shown itself to be “adaptable and resilient”, but also to the state: “The federal government’s stabilization measures show Effect.”
But was preventing a major crisis really that joint effort? Or do Habeck’s statements contain a portion of self-praise too much? These questions are crucial with a view to possible upcoming crises and the balance of economic policy interventions.
Strong influence: No lack of gas
In particular, the federal government has managed to ensure that the greatest danger to the economy in Germany does not materialize: a shortage of gas. Forecasts of how much a gas shortage would have impacted German GDP diverged further. But one thing is clear: it would have been more than the minus of 0.4 percent forecast by the federal government in autumn.
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Even before the Russian attack on Ukraine, the federal government had started to take precautions. In December 2021, the “Bunker Round” was set up in the Chancellery. Germany’s gas supply was discussed in a tap-proof room. In the months following the Russian attack, Habeck and Co. toured the world, procuring gas as an alternative to Russian supplies via the Baltic Sea pipelines, which dried up completely in the fall.
“There’s no question that the federal government in particular managed to fill up the gas storage tanks in good time,” says Martin Werding. Liquefied natural gas (LNG) vessels were chartered in a hurry.
But it is also clear that the gas savings in private households may be based to some extent on political appeals. Rather, the high prices and, above all, the warm weather ensured that the gas was enough without any problems.
And Germany’s gas strategy has also weighed on the economy. For the first few months, Germany took all the gas you could get your hands on, the price didn’t matter. “On the other hand, the fact that the government bought all the gas, no matter how expensive, drove inflation further,” notes Werding. Despite falling prices, the federal government is still expecting an inflation rate of 5.9 percent for the current year, and next year it should be 2.7 percent.
Hardly any impact: easing on global energy markets
Above all, the decline in energy exchange prices since late summer has improved the economic outlook. If the gas supply situation had become more precarious, if the construction of the LNG terminals would have taken longer, that would certainly have pushed prices up longer.
The industry has been stabilizing since January.
(Photo: IMAGO/blickwinkel)
Overall, however, the influence of the German government on the global energy markets is limited. The economist Achim Truger says: “The terminals were probably not initially decisive for the development of energy prices.” Other factors are more important for the price development, such as the warm winter, the course of the Ukraine war and the OPEC oil cartel.
Light and shadow: State support measures
With its various relief packages and ultimately the energy price brakes, the government has undoubtedly ensured that the economy has not slipped as feared. Above all, it supported private consumption. According to the new government forecast, this should shrink only minimally by 0.1 percent in 2023 despite high inflation, and then grow by 2.1 percent in 2024.
There is no question that the federal government in particular has succeeded in filling up the gas storage facilities in good time. Martin Werding, economist
The price brakes for gas and electricity came late, after emergency aid in December only in March of this year. The government had been at odds for months last year. Although energy prices on the stock exchange are falling again, consumption should continue to be supported by the brakes. “The increases of the past few months will only be felt by tenants in the near future. The energy price brakes will play an important role in cushioning this burden,” said Timm Bönnke, co-head of economic activity at the German Institute for Economic Research (DIW).
Low earners may be able to stabilize their consumption thanks to the aid. Higher earners expand them but probably still. “Even this untargeted aid has created inflationary risks,” says economist Werding. “The expansive fiscal policy has two faces.” The statement of the economist, who sits on the employers’ council of experts, does not necessarily come as a surprise.
>> Read here: Follow all current developments in the energy crisis in the news blog
But his colleague Truger – supported by the unions – takes a similar view: “I cannot deny that the expansive fiscal policy also has a certain inflationary effect.” In addition to the price brakes, he points to the reduction of the so-called cold progression, i.e. the creeping one Tax increases due to inflation.
Hardly any influence: adaptability of the industry
The biggest horror forecasts last autumn were based on a sharp slump in energy-intensive industrial sectors. There was a slump, but the industry has been stabilizing since January. “In the fall we saw some industrial lobbying that degenerated into hysteria,” says DIW researcher Bönnke. For example, some companies have switched from gas to oil. The federal government reduced the bureaucratic effort for this last year. However, most of the stabilization can be attributed to the fall in energy prices.
In addition, according to Bönnke: In the high-price phase of 2022, it was quite possible that individual companies with long-term supply contracts reduced their own production and resold gas – and thus made profits. They may have used this as an economic buffer in the winter.
No impact: China’s sudden end to zero-Covid policy
What hardly anyone could have guessed last fall was the complete reversal of China’s Covid policy. “The situation in China has turned 180 degrees. Neither economic researchers nor politicians could expect the sudden complete departure from the zero-Covid policy,” says Geraldine Dany-Knedlik, co-head of economics at the DIW. This is already reflected in the economic figures. In the first quarter of 2023, the People’s Republic’s GDP rose by 4.5 percent year-on-year. The German economy, which is heavily dependent on foreign trade, is benefiting from the significant upswing.
Conclusion: divided picture
Business cycle is complex, the list could go on. But one thing is clear: the government has supported the economy in some areas, but by no means all of them. The Werding economist states: “Overall, the government has done a lot, but China’s departure from the zero-Covid policy alone should have a stronger effect than the government measures.”
And at the same time it must be noted that Habeck only presented a prognosis. The economy in Germany could also be significantly worse. The Handelsblatt Research Institute, for example, predicts that the German economy will shrink by 0.2 percent in 2023, despite the improved situation.
More: Bundesbank: Economy likely to have grown again in the first quarter