The German economy may experience a mild recession, but a severe one can still not be excluded

The German economy is proving remarkably robust under challenging conditions, even though the economic situation remains gloomy. Although economic output is likely to decline somewhat in the winter half-year, a severe recession is becoming increasingly unlikely, and the economic outlook is cautiously optimistic.  Energy prices, for example, recently fell again somewhat. Despite the cold temperatures in recent weeks, gas storage facilities remain well-filled, and gas supplies are stable. Nevertheless, it is too early for optimism. Global risks remain high – and not only about the further development of the war in Ukraine. For example, the German economy is likely to be increasingly impacted by the cooling of the global economy. The pandemic situation in China is also unclear at the moment. Following the abrupt departure from strict containment measures, there could be a massive surge, reinforcing supply chain problems. In addition, monetary tightening in the face of high inflation will dampen the economy somewhat in the coming year.

In industry, there are signs of a slight easing. New orders continue to signal a slowdown next year. Nevertheless, the range of orders on hand remains high and industrial production is still on an upward trend into the current quarter. In the wake of the downward trend in energy prices, producer prices have also fallen somewhat recently. However, the crisis is not yet over, as the risks of recent months remain primarily in place.

Supported not least by the federal government’s relief packages and energy price brakes, which stabilized households’ disposable incomes, private consumption remained stable until recently and thus also strengthened the service sector: There was no significant slump, and the mood brightened again recently. However, the enormous consumer price inflation will likely dampen service providers’ sales. In addition, there are signs of a slight cooling in the labor market. The number of available jobs declined somewhat at the end of the year. Nevertheless, the robust labor market is helping the German economy, as most people need not fear job losses despite the difficult situation.

In my baseline scenario, I expect the German economy to experience a mild recession this winter, followed by a sluggish recovery. The economy will grow by 0.1 percent in 2023 on average and 1.2 percent in 2024. Inflation will remain high in 2023 but will approach the two percent target of the European Central Bank in 2024.

In an alternative scenario, Germany experiences a more severe recession. In this case, the economy will contract -0.5 percent in 2023 and see an even more subdued recovery in 2023.

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