German economy gets off lightly in the short term

Germany’s gross domestic product shrank by 0.2% in the fourth quarter. However, a severe winter recession, which was feared in the autumn, has become less likely, partly because a gas shortage is no longer expected in this so far mild winter. The German economy is showing encouraging resilience. Nevertheless, the risks to the economy remain high. I am somewhat more pessimistic regarding economic growth in 2023 than some of my colleagues.

For example, the Russian war of aggression in Ukraine still has enormous potential for escalation. In addition, inflation remains high and the European Central Bank’s tightening of monetary policy is likely to dampen the economy this year. Nevertheless, the Chinese economy is expected to provide a positive stimulus to the global economy, provided that the fierce corona wave in China subsides. This would further improve the prospects for German industry in particular. Although new orders are still slow to come in, industrial companies are still sitting on well-filled order books and have so far been able to ride out the slump in orders largely unscathed.

Private consumption was an important pillar of the German economy until the autumn, thanks in part to the government’s economic stimulus packages and energy price cuts. After two winters of weak sales, the restaurant sector, for example, was able to record growth again. However, the enormously high inflation is leading to a loss of purchasing power, especially for people on low and medium incomes, which is already dampening private consumption towards the end of 2022. Household consumption is also unlikely to stimulate the economy at the beginning of the year. At least the still low unemployment rate is providing support. The absence of a dramatic energy crisis is also giving many people a positive outlook, and the consumer climate has recently become less pessimistic than in previous months. This supports the services sector, which accounts for around two-thirds of total economic value added. In the short term, the German economy is likely to escape unscathed. Structurally, however, Germany still faces enormous challenges in returning to meaningful economic growth, particularly in terms of energy transition and the renewal of public infrastructure.

In my baseline scenario, I expect the German economy to experience a mild recession this winter, followed by a sluggish recovery. Overall, the economy will stagnate in 2023 on average and grow by 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. My baseline scenario is somewhat more pessimistic than the forecasts of some of my colleagues. Many of them now expect the economy to modestly grow in 2023.

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 2024.

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