The port on the Elbe is threatened with a loss of handling due to the war in Ukraine.
(Photo: dpa)
Berlin The economic prospects in Germany continue to deteriorate. The Kiel Institute for the World Economy continues to anticipate growth in German gross domestic product (GDP) of 2.1 percent for the current year, as shown by the economic forecast published on Wednesday. Compared to the spring forecast, however, the economists are reducing their growth forecast for the coming year from 3.5 to 3.3 percent.
The economic development in Germany continues to be associated with considerable uncertainties. The Russian war of aggression in Ukraine and in particular the further rise in energy prices that followed are having an enormous impact on the economy, which was actually well on the way to freeing itself from the clutches of the corona pandemic.
The big upswing after the pandemic is still missing. Instead, the downside risks currently predominate. Fear of recession is back. The economy was recently able to avert a technical recession, two consecutive quarters of declining economic output.
But the unclear outcome of the Ukraine war and concerns about ever-spreading inflation have brought back fears of a sustained recession. “The German economy continues to steer through turbulent waters,” says the IfW forecast.
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The reason is in particular the persistently high inflation, which according to the projections of the Kiel researchers will not go away anytime soon. For 2022, they estimate an inflation rate of 7.4 percent. It would be the highest value in reunified Germany. For 2023, the expectation is still 4.2 percent. “Price pressure will continue,” predict the economic experts. He is now going “well beyond the rise in energy and food prices”.
Inflation eats away at purchasing power
In May, the inflation rate almost reached a record level of 7.9 percent. Rates of over 7 percent since March are at levels seen during the 1973-1974 and 1981 oil crises. Core non-energy inflation was 4.5 percent in May.
Inflation slows down the economy above all because it curbs the purchasing power of consumers. They are still sitting on high savings. Around 100 billion have accumulated during the Corona peak phases. The resulting higher consumption will become an important factor in ensuring that the low growth in the current year will occur at all.
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However, inflation means that citizens can afford significantly less from their savings. A large part of the consumption effect on the economy fizzles out. The rising salaries will not change anything in this regard. In terms of actual earnings, the IfW expects growth of 4.8 percent in 2021.
That would be an increase on a scale not seen in years – but it would still not compensate for the loss of purchasing power caused by inflation. In 2023, the salary increase should be five percent, just exceeding inflation. The effective earnings are the actual gross earnings paid by the employer to the employee.
Worry about hesitant ECB
Although the IfW confirms its forecast for the current year, the outlook for the rest of the year has deteriorated. The fact that the researchers are still sticking with growth of 2.1 percent is mainly due to the fact that the second quarter went better than expected. This is related to fewer restrictions than feared due to the corona pandemic.
The Kiel economists see a significant risk factor in the fact that inflation could continue unabated. This scenario threatens in particular if the reaction of the European Central Bank (ECB) is not sufficient.
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Last week, the ECB announced a first rate hike of 0.25 percentage points for July. A second will follow in September. The IfW is assuming a total of four interest rate increases this year. The key interest rate would therefore be 1.25 percent at the end of the year.
According to the prognosis, these envisaged steps were “timid”. “This increases the risk that inflation expectations will unanchor and inflationary pressures will solidify.”
The economic expectations of German financial experts have recently brightened only slightly. The mood barometer of the Mannheim research institute ZEW rose in June compared to the previous month by 6.3 points to minus 28 points, as the institute announced on Tuesday. On average, experts had forecast a slightly stronger increase to minus 26.8 points.
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