Leading economic research institutes predict growth of just 0.3 percent for the German economy in 2023. This is modest, but it should become the rule in the future.
< p>The winter was mild and energy consumption was lower than feared. The expected recession is not foreseeable, instead there is a small economic plus of 0.3 percent. “The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared in autumn,” corrects Timo Wollmershäuser, Professor at the Ifo Institute for Economic Research at the University of Munich, the forecast from last autumn.
The Ifo Institute belongs to the group of four leading German economic research institutes that prepare an expert opinion twice a year on behalf of the federal government. This spring, a research institute from Austria is also on board. The numbers they calculate are important for the tax estimate and the budget for the federal government.
Get away with a black eye
Even if the company's order books were full, the general conditions did not make it easy. “Continued delivery problems with primary products, strong turbulence with extreme price peaks on the energy markets and a lack of workers, also due to the exceptionally high number of sick leave, reduced the production possibilities of the German economy and prevented a stronger increase in domestic product”, lists Wollmershäuser.
Timo Wollmershäuser from the Leibniz Institute for Economic Research at the University of Munich
For 2024, the institutes expect growth of 1.5 percent. That is not certain, because geopolitical tensions and cold temperatures could trigger price jumps again at any time. “The danger of a shortage in the coming winter still exists,” says Wollmershäuser. He also assesses the medium-term prospects as less rosy. “According to our estimates, the average growth rate of the German economy will only be around half a percent towards the end of the decade.”
End of growth
This should show that the fat years in Germany are over for the foreseeable future. This has less to do with the consequences of the corona pandemic and the Ukraine war. The aging society, too few workers and, above all, the departure from gas, oil and coal, which initially results in higher energy prices, are affecting Germany.
Cheap fossil energy was long the basis for the successful German business model. Now everything is different in one fell swoop. No more gas from Russia, instead expensive replacement deliveries and the realization that the switch to climate-friendly energy must be accelerated significantly simply because of increasing global warming.
Fewer horses and less feed
Stefan Kooths, Professor at the Kiel Institute for the World Economy, tries to use an easily understandable language to make a complex situation tangible: “The growth prospects for the German economy can be compared with that speed of a horse-drawn carriage, where the number of draft animals is decreasing, at the same time less concentrated feed is to be fed, but more passengers want to ride.”
Fewer horses, less power, less speed
In the current situation, it is important “to oil the wheels and drop ballast”. That could happen, for example, by lowering “the high tax burden” or through qualified immigration, explains Kooths. State economic stimulus programs, on the other hand, would not help, but – to stick with the metaphor – were “nothing more than lashes”, which would only provide a short-term boost.
Subsidies only slow down
The scientists consider the discussion about making industrial electricity cheaper to be misguided. Security and costs of the energy supply are important location factors, but the energy transition cannot be achieved without a controlling “price mechanism”. “Compliance with the climate targets requires enormous efforts in terms of energy efficiency, and the experience of the past year has shown that the price of energy can be a really suitable instrument for increasing this efficiency,” says Timo Wollmershäuser.
More coal is being burned again in Germany
The economists clearly reject the promise often made by politicians that the conversion of the economy towards climate neutrality will give the economy an additional boost. Production capacities in the economy would only be rebuilt. “There is no double dividend – more climate protection and a growth miracle on top of that. Unfortunately, that's an illusion,” says Stefan Kooths.
Prices remain high
It is all the more important to improve further framework conditions, which also include the fall in inflation. The institutes do not expect the situation to ease until next year. Then the inflation rate should fall to 2.4 percent, after six percent this year. That will boost private consumption from the second half of the year, because then real wages should also increase again.
Building has become very expensive due to rising interest rates
The institutes see industry as a pillar of the economy, which should benefit from easing supply bottlenecks and cheaper energy. The construction industry, on the other hand, will slow down. “Demand will remain weak, especially in residential construction, also because the European Central Bank will continue to tighten its monetary policy course and thus financing costs will continue to rise,” says Wollmershäuser.
Rossy times for employees
The institutes have good news ready for the labor market. The number of people in employment is likely to increase further, from around 45.6 million last year to around 46.0 million in the coming year. However, the number of unemployed is likely to increase temporarily to almost 2.5 million this year, since the Ukrainian refugees will not immediately gain a foothold in the labor market. In 2024, unemployment is likely to drop again to a good 2.4 million.
Stefan Kooths from the Kiel Institute for World economy (left), Oliver Holtemöller from the Leibniz Institute for Economic Research Halle (IWH) and Timo Wollmershäuser from the Leibniz Institute for Economic Research at the University of Munich
In principle, the scientists foresee rosy times for employees, since they are likely to “have the upper hand” in collective bargaining in the coming years. “Therefore, if in doubt, we will see strong wage increases,” says Stefan Kooths. In times of a shortage of skilled workers and demographic change, companies would have to “respond much more to the wishes of the workforce in order to remain attractive as employers”. described as “remaining weak”. The increase in interest rates, which is “unusual in historical comparison” and which is “not over” in the foreseeable future, has had a significantly dampening effect. “We are expecting at least smaller interest rate increases and that is slowing down investments,” says Stefan Ederer from the Austrian Institute for Economic Research (WIFO).
A risk for the global economy is currently emanating primarily from the financial sector. “Rising interest rates is causing asset prices to fall, and if banks are not adequately hedged against this, there may well be a loss of confidence.”