Germany to Return to Growth in 2024 as Inflation Rockets, Gas Supplies Dwindle

Lower supplies of Russian gas and high inflation are causing havoc in the German economy, which is heading into a “winter recession” and will not recover until 2024, research institute Ifo said on Monday.

Ifo sharply lowered its forecast for GDP growth in 2023 to minus 0.3%, compared to a previous growth forecast of 4.3%.

The research institute now expects inflation to average 9.3% in 2023, a whopping 6.0% higher than its previous forecast.

“These are unusually large changes in such a short period of time … The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus,” said Timo Wollmershauser, head of forecasts at Ifo.

“We are heading into a winter recession … The loss of purchasing power, as measured by the decline in real per capita wages this year and next by about 3% each, is higher than at any time since the current system of national accounts was introduced in 1970,” added Wollmershauser.

A bright spot in coming months, said Ifo, could be the manufacturing sectors, which suffered a “setback in the summer” due to high costs and lower consumer demand.

Activity in the petrochemicals-intensive construction industry also slowed down due to higher interest rates pushing financing costs up.

However, Ifo said the manufacturing sectors will gradually work off the high order backlogs in coming quarters, slowly expanding its output.

“The assumption is that supply bottlenecks will continue to be a hindrance but will gradually ease as the global economy cools. It is also assumed that there will be no gas shortages during the winter, which would be followed by a rationing of gas supplies to manufacturing companies,” said Ifo.

“Consequently, manufacturing and the associated business service providers will support the economy in the forecast period. By contrast, construction, which is likely to suffer most directly from rapidly rising financing costs, will act as a brake.”

Germany’s inflation rate – it stood at 8.8% in August – is set to rise further as the energy crisis continues unabated, said Ifo.

Energy suppliers will be “markedly adjusting their electricity and gas prices” in the light of high procurement costs, especially at the beginning of 2023, it said, causing inflation in the first quarter of 2023 to jump to 11%.

“As a result, real household incomes will drop sharply and purchasing power decline noticeably. The government’s third relief package is likely to counteract this decline somewhat, but it will fall far short of offsetting it,” said Ifo.

However, the institute said there should be sufficient gas available in winter; energy prices, therefore, should stop rising and potentially fall from spring 2023.

Despite the woes, Ifo said Germany’s strong labour market is set to resist the crisis.

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