Germans have to be prepared for the fact that inflation in the coming years will be well above the 2 percent target set by the ECB. But there is also good news: According to a forecast by the IWH, the German economy could stagnate in 2023 instead of falling.
Stagnation instead of severe recession: The Leibniz Institute for Economic Research Halle (IWH) is not forecasting any more economic downturns for the coming year. According to the published forecast, gross domestic product will remain at the level of 2022. In September, the economists had predicted a decline of 1.4 percent. The now more optimistic forecast is justified by the fact that the subsidization of energy through the gas and electricity price brakes will dampen the decline in real income and private consumption.
Growth of 1.8 percent is expected for the year that is coming to an end, which is expected to be slightly exceeded in 2024 at 1.9 percent. At the turn of the year, however, the IWH sees the German economy in a difficult situation: the rise in energy prices is increasing the cost of living, while financing conditions have deteriorated, also due to more cautious lending by the banks. “However, the German economy has so far been quite robust, and production has expanded into the autumn as part of the recovery from the pandemic,” said IWH Vice President Oliver Holtemöller.
From the spring, a further relaxation of the international supply chains and a revival of the global economy should provide support. “Impulses also come from the high pressure to modernize the German economy,” say the researchers. “This applies, for example, to energy-related refurbishment as an adjustment to changed cost structures.” The institute does not expect any major easing of inflation yet. Consumer prices are likely to rise sharply by an average of 6.5 percent next year, albeit not quite as much as in 2022 with 7.8 percent.
In 2024, the rate of inflation should also be 3.5 percent, well above the two percent mark that the European Central Bank (ECB) is aiming for. “The gas and electricity price brake should cushion the economic slump in winter,” said economic expert Holtemöller. “But it also increases the risk that the inflation rate will be further fueled by the high debt-financed state transfers.”