The German economy continues to face fierce headwinds from the energy crisis, high inflation rates, and the cooling global economy. Germany is likely to have slipped into recession as early as the third quarter of 2022 and this is unlikely to end before the summer of 2023. Provided there is no gas shortage, the recession is likely to be less deep than during the pandemic or the financial crisis, but the probably permanently higher energy prices are also likely to dampen economic development in the medium term and lead to structural changes in industry.
In the wake of the weakening global economy, new orders for German industry are declining not only from the domestic market but also from abroad. At least the hitherto stubborn bottlenecks in international supply chains appear to be gradually easing, allowing the still high order backlog to be processed more efficiently. However, the main problem for German industry is the energy crisis, even though prices for gas and electricity have recently retreated from their highs in August. In addition, the planned gas price cap will now prevent the worst from happening.
Services are also now in a downturn after an interim high in the spring. High inflation is severely dampening household purchasing power. In addition, the savings built up during the pandemic have now been used up. At least the planned gas price cap is easing the worries of many people, even though the financial burden will still be considerable, especially for low- and middle-income households. Another bright spot is that the situation on the labor market is still robust, which is providing some support for private consumption.
All in all, I expect the German economy to grow by 1.4 percent this year and contract by 0.6 percent next year. From today’s perspective, things could then pick up again in 2024, although this is of course still quite uncertain. However, high growth rates are not to be expected. At the moment, I expect GDP to grow by 1.2 percent in 2024. Inflation will remain high for the time being, but in my view it will approach the central bank’s two percent target again by 2024. However, I expect inflation to come down more quickly than many think. Most underestimate how much the recession, the easing in supply chains, and the absence of dramatic energy price increases will depress inflation. Next year, I still expect inflation to average just under four percent.
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