Recession and inflation at 8.8% for Germany in 2023

The German economy must prepare for a difficult year 2023 with rising inflation, expected at 8.8%, and a drop in GDP of 0.4%, according to forecasts by the main economic institutes, which foresee “a loss of lasting prosperity.

The energy crisis caused by the Russian invasion of Ukraine was the trigger for the economic slowdown in Europe’s largest economy.

“The main reason for the deteriorating economic outlook is the reduction in gas exports from Russia,” write the institutes (DIW, IFO, IFW, IWH and RWI) in their autumn report.

No ebb of inflation expected before 2024

While German gross domestic product (GDP) is expected to grow another 1.4% this year, the institutes predict a 0.4% contraction next year, followed by a 1.9% rise in 2024.

Cumulative economic output in 2022 and 2023 is expected to be €160 billion lower than what these economists forecast in the spring.

The inflation rate, which has broken records in recent months, is expected to “increase further in the coming months.” The average price increase for 2023 is expected to reach 8.8%, even more than the 8.4% figure forecast for this year.

It is only in 2024 that inflation could fall back around the 2% mark, the target set by the European Central Bank.

But Germany will not be out of the woods, economists say.

“Even if the situation eases a bit in the medium term, gas prices should remain well above pre-crisis levels. This will result in a lasting loss of prosperity” for Europe’s largest economy, they warn.

Industrial model questioned

Germany, which was supplied with 55% of Russian gas before the war, must now be supplied elsewhere, at much higher prices.

It is its entire industrial model, based largely on cheap energy imports, that is in question.

“Longer-term burdens will persist and the loss of prosperity, due to the haemorrhage of income linked to the increase in energy prices, will also persist in the long term,” the economists forecast.

“This is not a passing phenomenon and will keep us busy for a long time,” they say.

Recession is also the scenario adopted for Germany by the OECD, which, in the forecasts published this week, foresees a fall in the country’s GDP of 0.7% next year.