The consequences of the Ukraine war put the German economy under pressure.
(Photo: dpa)
Berlin Rising energy prices, comprehensive sanctions and disrupted supply chains are weighing on the German economy. The Kiel Institute for the World Economy (IfW) has lowered its economic forecast for the current year to 2.1 percent in view of the consequences of the Ukraine war. In December, the economists had still expected growth in gross domestic product (GDP) of four percent.
“The war in Ukraine is leading to high raw material prices, new supply bottlenecks and dwindling sales opportunities,” says the forecast published on Thursday. The researchers firmly believe that there will be a technical recession, i.e. two consecutive quarters of declining economic output.
After GDP had already fallen by 0.3 percent in the fourth quarter of 2021, the people of Kiel expect a minus of 0.9 percent in the first quarter of 2022, in particular as a result of the Ukraine war.
Due to the sharp rise in energy prices, they expect inflation to be higher than ever in reunified Germany in the current year. The inflation rate is expected to be 5.8 percent, after 3.1 percent had been expected in December. “The war in Ukraine is increasing the already high price pressure,” the forecast continues.
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The federal government is also expecting inflation to be significantly higher than the previously assumed 3.3 percent. “In view of the latest developments, this should be significantly exceeded,” says a report by the Ministry of Economic Affairs, which is available to the Handelsblatt. Orders of five percent and more are no longer unrealistic.
Energy prices could slowly decline
For the forecast, the researchers assumed that the war in Ukraine will not end in the near future and that the sanctions against Russia will remain in place. However, the Kiel scientists expect a normalization of energy prices. The price of crude oil is expected to rise to $105 per barrel in the next few weeks, but then drop to $85 by the end of 2023.
In addition, it is assumed that the European Central Bank (ECB) will raise interest rates in several stages starting in the third quarter in order to get inflation under control. The researchers assume that the key interest rate will rise to one percent within a year.
After the first quarter with a minus, the people of Kiel are expecting a somewhat more relaxed economic situation. They forecast that the German economy will grow slightly again in the second quarter of the current year and more strongly in the third.
In the coming year, at least a small part of the growth should be made up for, which is unlikely to happen this year. The IfW is therefore raising its growth forecast for 2023 from 3.3 to 3.5 percent.
220 billion euros on the high edge
Despite all the crises, this recovery is to be supported by demand from private households. During the corona pandemic, many people saved their money because they could not spend it in restaurants or on cultural events. According to the IfW, savings in Germany should now be around 220 billion euros.
With the largely end of the corona measures in the next few days and weeks, a sharp increase in consumption is expected. This should also be possible because the global supply bottlenecks would be reduced. The IfW expects a sudden drop in the savings rate from 15 percent last year to eleven percent this year.
The price increases should then slowly recede again. The inflation forecast for the coming year is 3.4 percent. However, it is significantly higher than the December forecast – at that time the economists had expected two percent.
The scientists do not see any noticeable effect on unemployment as a result of the Ukraine war. According to the forecast, the unemployment rate will steadily decrease from year to year.
However, it is burdened with considerable uncertainty. The possibilities for deviations both downwards and upwards are great. In 2022 and 2023, according to the Kiel forecast, a slight contraction in economic output is within the realm of possibility.
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