The Kiel Institute for the World Economy does not expect any “strong” economic growth this year. The word “upturn” is also written in lower case in the economic forecast of the Munich Ifo Institute.
Construction workers during their breakfast break
The Ifo Institute has confirmed its economic forecast for 2023 and 2024. Accordingly, economic output this year will remain at around the level of the previous year (-0.1%). While the economy in consumer-related sectors is suffering from high inflation and is shrinking, industrial activity will support growth. In the coming year, the economy should then grow more strongly, by 1.7 percent.
“Following a further decline in gross domestic product by 0.2 percent in the first quarter, the economy will recover over time. Rising real wages will support the domestic economy by the middle of the year at the latest,” says ifo economic researcher Timo Wollmershäuser.
Also no upswing in sight in the north
The Kiel Institute for the World Economy (IfW) is not expecting a strong upswing in Germany due to the continuing loss of purchasing power among consumers as a result of persistently high inflation. The institute raised the growth forecast for 2023, but only from 0.3 to 0.5 percent.
“The German economy is struggling to get out of the energy crisis,” summarized the IfW the situation in its spring forecast published on Wednesday. Deep declines in production could be avoided. “However, the economic fallout from the war in Ukraine has stalled recovery from the pandemic.”
Inflationary pressures remain high
When it comes to inflation, the Kiel Institute for the World Economy (IfW) does not give the all-clear in its economic forecast. “Price inflation will probably remain stubbornly high for some time.” Accordingly, consumer prices will rise by 5.4 percent this year, and then by 2.1 percent in 2024. The rate of inflation was 6.9 percent last year.
“High inflation reduces the disposable income of private households and leads to a decline in private consumer spending in the current year”, according to the IfW. A “noticeable loss of purchasing power” of 1.8 percent is emerging.
The construction industry will not provide any significant economic stimulus this year
The Ifo Institute is similarly cautious when it comes to inflation. “Inflation has peaked. The average rate for 2023, at 6.2 percent, is likely to be lower than last year. In 2024, the rates will normalize and inflation will reach 2.2 percent,” says Timo Wollmershauser. The reasons for this are falling energy prices and a gradual resolution of delivery problems in industry.
Stagnation also on the labor market
“The labor market remains robust despite the economic downturn,” writes the IfW. The unemployment rate is likely to remain at a good five percent, and the number of people in work this year will rise by almost 300,000 to more than 45.7. However, the consequences of demographic change are likely to become increasingly apparent. “Employment will peak in the coming years,” warns the IfW. “In view of the high inflation, the massive shortage of skilled workers will lead to strong wage increases.”
According to the Ifo Institute, the economic weakness will slow down the recovery on the labor market somewhat this year. The increase in the number of unemployed by almost 50,000 people is mainly due to Ukrainian citizens, who will gradually be integrated into the labor market in the forecast period. The unemployment rate is therefore likely to drop again to 5.1 percent next year, after 5.4 percent this year and 5.3 percent last year.
Declining debt?
Ifo economists predict that the state budget will remain in the red this year and next, at 1.5 and 0.3 percent of economic output respectively. However, the state financing deficit is significantly lower than expected in December. In particular, the expenditures that were estimated for the government energy price brakes were reduced by a total of a good 35 billion euros because, from today's perspective, the procurement prices for electricity and gas in the forecast period are lower than expected.
The Kiel economists expect a Slight budgetary easing: Due to bubbling revenues and falling crisis spending, the public deficit is likely to fall: The IfW is assuming new debt of 1.4 percent of gross domestic product for the coming year, after 2.6 percent in 2022. The debt level should be reduced during this period from 66.4 to 63.5 percent.
The Kiel experts do not see any major impetus for the European export champion from the global economic side. “However, in view of the easing supply bottlenecks, companies in the manufacturing sector can start working off their previously accumulated order backlog, even if the persistently high energy prices are a burden on the energy-intensive sectors.”
dk/hb (rtr, Ifo- Institute)