German economy does not get out of crisis mode

More than two years of pandemics and the energy crisis triggered by the war in Ukraine are causing permanent stress in the German society and the economy. The drought in summer and the low water levels of the Rhine and other rivers added to these problems. The already foreseeable decline in economic output in the third quarter of 2022 will probably be somewhat higher than recently expected due to the transport bottlenecks caused by the low water levels. A decline of half a percent would no longer be a surprise. For 2022 as a whole, economic growth is not expected to exceed 1.5 percent. In particular, many deliveries are delayed because ships on the Rhine can often only be loaded to less than half their capacity. It is true that less than ten percent of all goods transported in Germany are carried by inland waterway vessels. However, the goods transported on the Rhine, such as coal, oil or chemicals, play a central role for the German economy. The situation has recently eased a little – it is to be hoped that the rain will continue to fall regularly. The negative impact on the German economy is likely to be felt overall, albeit not dramatically.

However, this should not obscure the fact that the effects of climate change are becoming increasingly apparent and are impacting the economy. Extreme weather events such as long periods of drought, heat waves or, conversely, extensive rainfall with associated flooding will in all likelihood continue to increase. Plans to significantly reduce greenhouse gas emissions can only slow global warming, not stop it. The costs of climate change are likely to be increasingly felt in the economy as a whole, dampening growth in gross domestic product.

This summer’s drought also highlights an important aspect of global warming: the more frequent occurrence of extreme weather events is increasingly amplifying the effects of other negative events. At the moment, for example, capacity bottlenecks on the Rhine are exacerbating the energy crisis because coal and oil cannot be transported in the usual quantities. The drought is also exacerbating problems in many supply chains that arose in the wake of the Corona pandemic and the Ukraine war. A striking example is the increased demand for grain transport vessels on the Danube caused by the war, which coincides with higher demand for such vessels on the Rhine, where a single one can only be partially loaded. Last year, the pandemic and an extreme weather event already contributed to the supply bottlenecks for semiconductors: for example, the pandemic led to a huge increase in demand for electronic equipment and cars. At the same time, production capacity for semiconductors was limited – not only, but also because of an extreme winter event in Texas that temporarily halted production there.

There are indications that extreme weather events will occur more frequently in the future together with other negative events. We must assume, for example, that the geopolitical tensions with Russia and China will continue. The conflict over Taiwan in particular shows us how strongly we are dependent on semiconductor production there. It is important that we as a society become even more resilient in order to deal with such events and the advancing climate change. Supply chains will probably become more and more diversified. And in Germany and other countries, there is a huge backlog of infrastructure needs. The energy crisis is a particularly striking illustration of the huge costs of the energy turnaround, which has been delayed for years. The pandemic has made clear to us the gaps in digitization or in education. And there is obviously a need, in some cases considerable, for investments in the Rhine, for example, that can reduce the impact of droughts on shipping in particular.

It is impossible to fully prepare for crises, that is in the nature of things. To be sure, there is no denying that the German economy has been robust in recent crisis years despite all the problems. But that is no reason to rest on one’s laurels; the challenges are greater than ever. This makes it all the more important to quickly achieve the transformation to a climate-neutral and digital economy.

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Japan: Solid recovery from the pandemic this year, but clouds are gathering

The Japanese economy is doing well over the summer. Gross domestic product recovered at a solid rate of 0.5 percent in the second quarter of 2022. The recovery was mainly driven by robust consumption growth after lockdown measures to contain the pandemic were lifted. Business investment also increased, while private residential investment contracted as in previous quarters.

I expect economic growth to be rather solid this year. In the third quarter, I again think that the economy will expand at a relatively high rate before slowing down in the fourth quarter. As in many other countries, inflation is a serious risk to the outlook. Currently, inflation remains above the central bank target rate. Energy prices will probably remain high, but I do not see further depreciation pressures on the yen.

Overall, I expect economic growth to average 1.4 percent in 2022 and 1.2 percent in 2023 and 2024. Inflation will be at 2.2 percent in 2022 before decreasing to 1.6 and 1.2 percent in 2023 and 2024.

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What caught my eye: Scientific writing, central bank digital currencies, the rise of the side startup, and much more…

“Maybe because writing is so often the final step in a research project (when we are exasperated and ready to be done with the damn thing), scientists tend to think of it as ornamental, akin to a peacock’s tail, and not as a core metabolic process in the cycle of scientific innovation.

This is a grave problem. The way that we write is inseparable from the way that we think, and restrictions in one necessarily lead to restrictions in the other.” by Roger’s Bacon:

https://newscience.substack.com/p/scientific-styles

“Do Funding Agencies Select and Enable Risky Research: Evidence from ERC Using Novelty as a Proxy of Risk Taking” From the abstract “Concern exists that public funding of science is increasingly risk averse…We find that applicants with a history of risky research are less likely to be selected for funding than those without such a history, especially early career applicants.” by Reinhilde Veugelers, Jian Wang & Paula Stephan

https://www.nber.org/papers/w30320

“The changing structure of government consumption spending” by Alessio Moro and Omar Rachedi:

https://onlinelibrary.wiley.com/doi/full/10.1111/iere.12568

“Green energy depends on critical minerals. Who controls the supply chains?” by Luc Leruth, Adnan Mazarei, Pierre Régibeau and Luc Renneboog:

https://www.piie.com/publications/working-papers/green-energy-depends-critical-minerals-who-controls-supply-chains?

“The optimal amount of central bank digital currency in circulation: Early evidence suggests that the expected impact of issuing a digital euro on bank profitability and lending depends on the bank’s reliance on deposit funding and the amount of digital euro in circulation. This is due to the perceived substitutability between central bank digital currencies and bank deposits. The optimal amount of central bank digital currency in circulation for the euro area lies between 15% and 45% of quarterly GDP.” by Lorenzo Burlon, Carlos Montes-Galdón, Manuel A. Muñoz, Frank Smets:

https://cepr.org/voxeu/columns/optimal-amount-central-bank-digital-currency-circulation

“The rise of the side startup: Remote workers are starting new businesses behind their bosses’ backs.” by Rani Molla:

https://www.vox.com/recode/23299590/side-startup-remote-workers-founding-businesses-while-employed

“What’s in Store for China’s Mortgage Market?: The Chinese economy has been wracked by rural bank defaults and boycotts over mortgage payments”

https://carnegieendowment.org/chinafinancialmarkets/87664

The social capital atlas:

https://socialcapital.org

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U.S. Economy: Stagnation rather than Recession

The US economy contracted by 0.2 percent in the second quarter of 2022 (gross domestic product had already decreased in the first quarter by 0.4 percent. However, this was mainly due to the fact that exports declined significantly as a result of the low momentum of the global economy. Public sector consumption was also down. In addition, companies were more reluctant to build up inventories than in the final quarter of 2021, when they had replenished their stocks exceptionally strongly. Encouragingly, however, both private consumption and investment increased at solid rates.

Only moderately positive or even negative economic growth rates can be expected again in the further course of the year. The U.S. economy will certainly not grow strongly. The headwinds are too strong: Inflation, war in Ukraine and lockdowns in China are weighing on further development. In addition, monetary policy is becoming more restrictive. The U.S. Federal Reserve will continue to raise interest rates and also start to shrink its balance sheet. However, despite continuing interest rate increases, inflation will remain elevated and will probably only gradually decrease. In July, inflation was unchanged compared to June (according to the consumer price index). Within one year, inflation increased by 8.5 percent, which is still worryingly high.

For 2022 as a whole, I expect economic growth of only 1.5 percent followed by 1.7 percent in 2023. Inflation will remain high this year with an annual average of more than 7.0 percent. However, I think that inflation will decrease somewhat faster than others (but will remain elevated). Prices of various commodities and an easing of supply chain bottlenecks will contribute to somewhat lower inflation rates. In 2023 however, I expect inflation of somewhat less than three percent.

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Economic slowdown hits euro zone in worse shape than the USA

The global economy is severely impacted by various factors in the summer of 2022. Many countries are on the brink of recession. The Corona lockdowns in China and, from a European perspective, the war in Ukraine in particular, are reducing growth in many places, fueling inflation and bringing the euro zone in particular, but also the United States, to the brink of recession. The Chinese economy is also likely to show low growth rates this year and will not be able to act as an economic locomotive. After the financial crisis, Chinese stimulus programs were stimulating the global economy.

In the first half of 2022, economic output in many countries was already only moderate or even declining. The US economy, for example, contracted by 1.6 and 0.9 percent in the first two quarters of 2022 (annualized). The purchasing managers’ indices and consumer sentiment also point to subdued growth in the summer half-year. In addition, monetary policy is rapidly becoming more restrictive in view of high inflation on both sides of the Atlantic.

In the euro zone, the economy grew by 0.6 percent in the first quarter. However, this was primarily due to still strong export growth and a high inventory build-up. However, private consumption and investment have already declined somewhat. In the euro zone, too, in view of the depressed assessment of the economic situation and outlook among both companies and consumers, only stagnation is to be expected in the summer half-year. The global economy continues to be severely impacted by the war in Ukraine and the Chinese corona crisis. Recently, in particular, concerns about an impending gas shortage and even higher energy prices have increased noticeably again. These developments are also contributing to inflation remaining high. In addition, the export industry is suffering from the weak global economy. At present, the order backlog is still high. However, it can only be processed slowly because global supply chains are still disrupted and the shortage of starting products remains serious in many places. Although there are signs of a gradual easing in supply chains, the war in Ukraine and the lockdowns in China will probably continue to contribute to increased problems in the coming months. Supporting the economy, at least for the time being, are still the services, which are benefiting from the easing of the Corona protection measures. Tourism and the food service industry in particular are enjoying a good start to the summer. However, this recovery process is now gradually coming to an end. In addition, high inflation is significantly reducing household purchasing power, which is contributing to a marked deterioration in consumer sentiment.

Somewhat later than the U.S. Federal Reserve, the European Central Bank (ECB) raised its key interest rates in July to counter high inflation and dampen inflation expectations. In addition, the securities purchase program was ended in June. The increasingly restrictive monetary policy will further dampen the already weak economic growth and, together with the consequences of the war in Ukraine and the corona crisis in China, will probably lead to a slight decline in economic output in some euro area countries.

Looming recession hits euro area at an inopportune time

The growth freeze is hitting the euro area economies in worse shape than that of the United States. The U.S. economy digested the pandemic-induced slump in spring 2020 more quickly than the euro area. For example, the U.S. economy regained its pre-crisis GDP level of late 2019 as early as early summer 2021, whereas this was not the case for the euro area until about a year later.

An important reason for the rapid recovery in the United States is probably the extremely expansionary fiscal policy during the pandemic. In total, three fiscal packages amounting to nearly 15 percent of U.S. gross domestic product were passed in 2020 and 2021 under Presidents Trump and Biden. These fiscal packages have stimulated private consumption. In the euro area, by contrast, private consumption has not yet reached pre-crisis levels even at the beginning of 2022.

Even from the last major economic crisis – the financial crisis which originated in 2007/2008 – the US economy recovered more quickly than the euro zone. This is also due to the debt crisis that started in several euro area countries at the beginning of the last decade. As a result, economic output in the United States increased by around 25 percent between 2008 and 2021, while gross domestic product in the euro area increased by only 12 percent. In particular, the debt crisis in some euro area countries has widened the growth gap between the two economic areas.

Not only has economic output and private consumption developed significantly better in the USA than in the euro area, but so has investment in equipment – in other words, those key investments that are of great importance for long-term economic development. Looking at the entire period since 2008, equipment investment in the euro area has increased only marginally, while in the USA it has risen by more than 50 percent. Equipment investment in the euro area has also not yet fully recovered from the pandemic, while in the USA it was already well above pre-crisis levels by the beginning of 2021. The subdued investment trend is reducing growth prospects in the euro zone. At the same time, there is a high need for investment in Europe, particularly to successfully shape the energy transition and digitization. At least there is reason to hope that the “Next Generation EU” instrument will provide some impetus for investment in the euro area in the coming years.

Also important for long-term economic development are investments in research and development as well as software, which are part of intellectual property products in the national accounts. However, the data should be interpreted with some caution, as these are difficult to determine due to their intangible nature, among other things. After all, the development in the euro area was for a long time similarly dynamic as in the USA. In both economic areas, these investments have increased by around 70 percent since the financial crisis. Since the pandemic, however, a clear gap seems to have opened up between the United States and the euro area, according to the official figures. While the United States appears to be experiencing a boom in these intangible investments, they have plummeted noticeably in the euro area.

So even before the outbreak of the war in Ukraine, the euro area had already fallen further behind in growth during the pandemic. In this respect, it is also helpful to compare the forecasts for 2020 and 2021 made by the International Monetary Fund at the end of the year with actual developments. This comparison suggests that economic output in the United States in 2021 was only slightly more than one percent below the level assumed at the end of 2019. In the case of the euro area, on the other hand, there was still a gap of more than four percent.

Various scenarios conceivable for the coming economic development

Before the outbreak of the war in Ukraine, it could be assumed that the U.S. economy would achieve the growth path assumed by the International Monetary Fund at the end of 2019 in the current year. For the euro area, on the other hand, the International Monetary Fund assumed in January 2022 that the growth trend expected before the pandemic would still not be achieved in 2024 and that a prosperity gap of just over one percent of gross domestic product would probably remain. 

The war in Ukraine, which is a tragedy for the people affected, is now leading the global economy into a second crisis shortly after the pandemic. Similar to the debt crisis after the financial crisis, the war is now likely to put the brakes on economic recovery. In the further course, only low positive or even negative growth rates are to be expected in the developed economies. The headwinds are blowing too hard: Inflation, war in Ukraine and lockdowns in China all continue to weigh on economic development. Added to this is a monetary policy that is rapidly becoming more restrictive in the face of inflation. The US Federal Reserve and the ECB will continue to raise interest rates rapidly and make their monetary policies more restrictive.

As with the debt crisis ten years ago, the euro area is economically more affected by the war in Ukraine than the United States for obvious reasons. The growth gap with the United States is thus likely to widen further. An important difference to the debt crisis in the euro area today, however, is that the German economy is no longer the driving force in economic growth, but is one of the laggards, mainly due to its high energy dependence on Russia to date.

Two scenarios illustrate an approximate order of magnitude for the widening growth gap between the USA and Europe up to 2024, assuming further developments in GDP up to 2024 for the USA and the euro zone by means of a positive and a negative scenario for each (Fig. 4). These scenarios are not to be understood as complete forecasts, but are intended to illustrate how economic output could develop under the respective scenario. In the positive scenario, it is assumed that the central banks of the USA and the euro area succeed in controlling inflation with a more restrictive monetary policy in such a way that no recession occurs. In addition, it is assumed that the conflict in Ukraine will continue but that there will be no sudden halt in gas supplies to Europe. The negative scenario, on the other hand, assumes that the central banks will have to tighten the monetary reins to such an extent that a recession with a weak recovery will result. In addition, there will be a halt to gas supplies to Europe in the fall of 2022.

Even in a positive scenario, the GDP growth assumed at the end of 2019 will still not be achieved in the USA in 2024, leaving a gap of around one percent of GDP (Fig. 4). In the case of the euro zone, on the other hand, gaps of almost three percent will remain even in the positive scenario. A gap of a similar size would only arise for the United States in the negative scenario. By contrast, in this negative scenario, gaps of almost five percent will remain in the euro area in 2024. The pandemic and the ensuing war would then result in long-lasting losses in prosperity – also due to the triggered high inflation and monetary tightening.

I published an earlier version of this text on June 30.

Email: info@eagle-economist.com

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What caught my eye: The value of data, central bank digital currencies, and much more…

The “Great Resignation” in perspective:

https://www.bls.gov/opub/mlr/2022/article/the-great-resignation-in-perspective.htm

“Spillover Effects of Old-Age Pension across Generations: Family Labor Supply and Child Outcomes” by Katja Maria Kaufmann, Yasemin Özdemir, Han Ye: “We study the impact of grandparental retirement decisions on family members’ labor supply and child outcomes …. A one-hour increase in grandmothers’ hours worked causes adult daughters with young children to work half an hour less.”

https://www.cesifo.org/en/publikationen/2022/working-paper/spillover-effects-old-age-pension-across-generations-family-labor

“Options for access to and interoperability of CBDCs for cross-border payments” by the BIS:

https://www.bis.org/publ/othp52.htm

“What is the value of data? A review of empirical methods” by Diane Coyle and Annabel Manley:

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German economy: Economic engine continues to sputter

After a weak first half of 2022, the German economy is likely to stagnate at best in the third quarter of this year. The energy crisis, with continuing high concerns about a gas shortage and even higher energy prices, is the dominant slowing factor for the German economy. Energy prices are not expected to fall rapidly, which will also slow the decline in inflation. The global economy is also being weighed down by high inflation and a rapidly tightening monetary policy, which is dampening Germany’s exports. In May, the German trade balance turned negative for the first time in a long time in the wake of weaker exports and skyrocketing import prices for energy. The German growth model of the past is currently reaching its limits. Strong export and economic growth cannot be expected in the near future.

German industry in particular is suffering from the war in Ukraine. It is receiving significantly fewer new orders, especially from abroad. The currently still high order backlog can only be processed slowly because the disruptions to global supply chains are only easing slowly and the shortage of intermediate products is still a major problem.

The recovery in services, which began after the easing of the Corona protection measures, is now gradually coming to a halt, partly because households’ propensity to spend is being noticeably reduced by high inflation. After a weak first half, the German economy is already starting the third quarter with a lot of headwind. In the current year, the German economy is likely to grow only slightly by 0.5 percent. In 2023, too, growth is only expected to be low at 1.1 percent. Inflation will remain high this year and, despite falling significantly in 2023, will still be well above the central bank’s target of 2 percent.

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U.S. Economy: On the Brink of Recession with Inflation Remaining High

The U.S. economy contracted by 0.4 percent in the first quarter of 2022 compared with the previous quarter (annualized 1.6 percent). However, this was mainly due to the fact that exports declined significantly as a result of the low momentum of the global economy. Public sector consumption was also down. In addition, companies were more reluctant to build up inventories than in the final quarter of 2021, when they had replenished their stocks exceptionally strongly. Encouragingly, however, both private consumption and investment increased at solid rates.

Only moderately positive or even negative economic growth rates can be expected again in the further course of the year. In the second quarter of 2022, we might even see another slightly negative growth rate. The US economy will certainly not grow strongly. The headwinds are too strong: Inflation, war in Ukraine and lockdowns in China are weighing on further development. In addition, monetary policy is becoming more restrictive. The U.S. Federal Reserve will continue to raise interest rates and also start to shrink its balance sheet. However, despite continuing interest rate increases, inflation will remain elevated and will probably only gradually decrease. In June, inflation increased by 1.0 percent compared to May. Within one year, inflation increased by 8.6 percent, which is worryingly high.

For 2022 as a whole, I expect economic growth of only 1.6 percent followed by 1.7 percent in 2023. Inflation will remain high this year with an annual average of more than 7.0 percent. In 2023 however, I expect inflation of somewhat less than three percent.

Email: info@eagle-economist.com

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Impending recession hits euro zone in worse shape than the USA

The global economy will be severely impacted by various factors in the summer of 2022. Many countries are on the brink of recession. The Corona lockdowns in China and, from a European perspective, the war in Ukraine in particular, are reducing growth in many places, fueling inflation and bringing the euro zone in particular, but also the United States, to the brink of recession. The Chinese economy is also likely to show low growth rates this year and will not be able to act as an economic locomotive. After the financial crisis, Chinese stimulus programs were stimulating the global economy.

By the first quarter of 2022, economic output in many countries was already only moderate or even declining. The US economy, for example, contracted by 0.4 percent in the opening quarter of 2022 compared with the previous quarter (annualized 1.6 percent). This was mainly due to the fact that exports fell significantly, probably as a result of the low momentum of the global economy. Secondly, companies were much more reluctant to build up inventories than in the final quarter of 2021, when they had still replenished their stocks extraordinarily strongly. Encouragingly, however, both private consumption and investment increased at solid rates. The purchasing managers’ indices and consumer sentiment also point to subdued growth in the summer half-year. In addition, monetary policy is rapidly becoming more restrictive in view of high inflation on both sides of the Atlantic.

In the euro zone, the economy grew by 0.6 percent in the first quarter. However, this was primarily due to still strong export growth and a high inventory build-up. However, private consumption and investment have already declined somewhat. In the euro zone, too, in view of the depressed assessment of the economic situation and outlook among both companies and consumers, only stagnation is to be expected in the summer half-year. The global economy continues to be severely impacted by the war in Ukraine and the Chinese corona crisis. Recently, in particular, concerns about an impending gas shortage and even higher energy prices have increased noticeably again. These developments are also contributing to inflation remaining high. In addition, the export industry is suffering from the weak global economy. At present, the order backlog is still high. However, it can only be processed slowly because global supply chains are still disrupted and the shortage of starting products remains serious in many places. Although there are signs of a gradual easing in supply chains, the war in Ukraine and the lockdowns in China will probably continue to contribute to increased problems in the coming months. Supporting the economy, at least for the time being, are still the services, which are benefiting from the easing of the Corona protection measures. Tourism and the food service industry in particular are enjoying a good start to the summer. However, this recovery process is now gradually coming to an end. In addition, high inflation is significantly reducing household purchasing power, which is contributing to a marked deterioration in consumer sentiment.

Somewhat later than the U.S. Federal Reserve, the European Central Bank (ECB) raised its key interest rates in July to counter high inflation and dampen inflation expectations. In addition, the securities purchase program was ended in June. The increasingly restrictive monetary policy will further dampen the already weak economic growth and, together with the consequences of the war in Ukraine and the corona crisis in China, will probably lead to a slight decline in economic output in some euro area countries.

Looming recession hits euro area at an inopportune time

The growth freeze is hitting the euro area economies in worse shape than that of the United States. The U.S. economy digested the pandemic-induced slump in spring 2020 more quickly than the euro area. For example, the U.S. economy regained its pre-crisis GDP level of late 2019 as early as early summer 2021, whereas this was not the case for the euro area until about a year later.

An important reason for the rapid recovery in the United States is probably the extremely expansionary fiscal policy during the pandemic. In total, three fiscal packages amounting to nearly 15 percent of U.S. gross domestic product were passed in 2020 and 2021 under Presidents Trump and Biden. These fiscal packages have stimulated private consumption. In the euro area, by contrast, private consumption has not yet reached pre-crisis levels even at the beginning of 2022.

Even from the last major economic crisis – the financial crisis which originated in 2007/2008 – the US economy recovered more quickly than the euro zone. This is also due to the debt crisis that started in several euro area countries at the beginning of the last decade. As a result, economic output in the United States increased by around 25 percent between 2008 and 2021, while gross domestic product in the euro area increased by only 12 percent. In particular, the debt crisis in some euro area countries has widened the growth gap between the two economic areas.

Not only has economic output and private consumption developed significantly better in the USA than in the euro area, but so has investment in equipment – in other words, those key investments that are of great importance for long-term economic development. Looking at the entire period since 2008, equipment investment in the euro area has increased only marginally, while in the USA it has risen by more than 50 percent. Equipment investment in the euro area has also not yet fully recovered from the pandemic, while in the USA it was already well above pre-crisis levels by the beginning of 2021. The subdued investment trend is reducing growth prospects in the euro zone. At the same time, there is a high need for investment in Europe, particularly to successfully shape the energy transition and digitization. At least there is reason to hope that the “Next Generation EU” instrument will provide some impetus for investment in the euro area in the coming years.

Also important for long-term economic development are investments in research and development as well as software, which are part of intellectual property products in the national accounts. However, the data should be interpreted with some caution, as these are difficult to determine due to their intangible nature, among other things. After all, the development in the euro area was for a long time similarly dynamic as in the USA. In both economic areas, these investments have increased by around 70 percent since the financial crisis. Since the pandemic, however, a clear gap seems to have opened up between the United States and the euro area, according to the official figures. While the United States appears to be experiencing a boom in these intangible investments, they have plummeted noticeably in the euro area.

So even before the outbreak of the war in Ukraine, the euro area had already fallen further behind in growth during the pandemic. In this respect, it is also helpful to compare the forecasts for 2020 and 2021 made by the International Monetary Fund at the end of the year with actual developments. This comparison suggests that economic output in the United States in 2021 was only slightly more than one percent below the level assumed at the end of 2019. In the case of the euro area, on the other hand, there was still a gap of more than four percent.

Various scenarios conceivable for the coming economic development

Before the outbreak of the war in Ukraine, it could be assumed that the U.S. economy would achieve the growth path assumed by the International Monetary Fund at the end of 2019 in the current year. For the euro area, on the other hand, the International Monetary Fund assumed in January 2022 that the growth trend expected before the pandemic would still not be achieved in 2024 and that a prosperity gap of just over one percent of gross domestic product would probably remain. 

The war in Ukraine, which is a tragedy for the people affected, is now leading the global economy into a second crisis shortly after the pandemic. Similar to the debt crisis after the financial crisis, the war is now likely to put the brakes on economic recovery. In the further course, only low positive or even negative growth rates are to be expected in the developed economies. The headwinds are blowing too hard: Inflation, war in Ukraine and lockdowns in China all continue to weigh on economic development. Added to this is a monetary policy that is rapidly becoming more restrictive in the face of inflation. The US Federal Reserve and the ECB will continue to raise interest rates rapidly and make their monetary policies more restrictive.

As with the debt crisis ten years ago, the euro area is economically more affected by the war in Ukraine than the United States for obvious reasons. The growth gap with the United States is thus likely to widen further. An important difference to the debt crisis in the euro area today, however, is that the German economy is no longer the driving force in economic growth, but is one of the laggards, mainly due to its high energy dependence on Russia to date.

Two scenarios illustrate an approximate order of magnitude for the widening growth gap between the USA and Europe up to 2024, assuming further developments in GDP up to 2024 for the USA and the euro zone by means of a positive and a negative scenario for each (Fig. 4). These scenarios are not to be understood as complete forecasts, but are intended to illustrate how economic output could develop under the respective scenario. In the positive scenario, it is assumed that the central banks of the USA and the euro area succeed in controlling inflation with a more restrictive monetary policy in such a way that no recession occurs. In addition, it is assumed that the conflict in Ukraine will continue but that there will be no sudden halt in gas supplies to Europe. The negative scenario, on the other hand, assumes that the central banks will have to tighten the monetary reins to such an extent that a recession with a weak recovery will result. In addition, there will be a halt to gas supplies to Europe in the fall of 2022.

Even in a positive scenario, the GDP growth assumed at the end of 2019 will still not be achieved in the USA in 2024, leaving a gap of around one percent of GDP (Fig. 4). In the case of the euro zone, on the other hand, gaps of almost three percent will remain even in the positive scenario. A gap of a similar size would only arise for the United States in the negative scenario. By contrast, in this negative scenario, gaps of almost five percent will remain in the euro area in 2024. The pandemic and the ensuing war would then result in long-lasting losses in prosperity – also due to the triggered high inflation and monetary tightening.

Email: info@eagle-economist.com

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Germany: Inflation and War Interrupt Recovery of German Economy

The German economy continues to be hit hard by the war in Ukraine and the Chinese corona crisis. At the same time, both crises are driving inflation. Globally, too, there are signs of subdued economic development, from which Germany, as an export-oriented economy, is likely to be noticeably affected. The difficult environment is weighing on the German economy, which is nevertheless proving robust. However gross domestic product will probably stagnate at best in the second quarter.

The Ukraine war and the lockdown in China are weighing particularly heavily on the German industry, which continues to suffer from a severe shortage of intermediate products and raw materials. The production backlog continues, so that the high order backlog can only be processed sluggishly. The bottlenecks in international supply chains, which have existed since the pandemic, are only easing slowly and are also keeping inflation high.

Services are currently still benefiting from the easing of the Corona protection measures, which are stimulating tourism and gastronomy in particular. However, this recovery process is gradually petering out. However, high inflation is significantly reducing household purchasing power. The relief packages are only likely to dampen inflation somewhat temporarily. Decisive for the economy and inflation at the moment are the further course of the war in Ukraine and the Chinese pandemic policy.

In 2022, I only expect a growth rate for GDP of 1.2 percent followed by 1.4 percent in 2023.  I think that inflation will remain high at 7.5 percent on average this year. Next year, inflation will probably decrease to 2.7 percent.

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