The German Government’s Advisory Council of Economists, known as the “Five Wise Men”, sees inflation as the biggest risk to the German economy, despite the fact that growth prospects have improved thanks to the stabilization of energy supplies.
The “wise” expect Germany to grow 0.2% this year and 1.3% in 2024, but warn that high inflation means a loss of purchasing power and a weakening of demand as the engine of the economy.
For this year, the “wise” expect an inflation rate of 6.6%, while for 2024 they forecast an average rate of 3%.
“Near-term prospects have improved from fall 2022, but remain tense. High inflation continues to be a significant drag on the environment”, the experts point out in their report.
Although the report finds that inflation may have passed its peak, it is still high and will only slowly come down.
The Council’s rotating president, Monika Schnitzer, pointed out that the weakening of demand is worsening with the worsening of credit conditions due to the rise in interest rates, as well as the slow recovery of external demand.
With eurozone inflation still well above the ECB’s 2% target, further interest rate hikes could follow later in the year, the report notes.
On the other hand, uncertainty in financial markets makes it difficult for central banks to fight inflation.
Despite the tense economic situation, the labor market in Germany remains stable. The wise expect a slight rebound in employment until 2024 and wage increases of 5.9% in 2023 and 4.5% in 2024.
“Until 2023, the wage increase will be below inflation. An increase in real wages can only be counted on in 2024. This is likely to increase private consumption,” said the council’s labor market expert Achim Truger.
The prospects for public finances, according to the report, have improved because spending on measures to offset the increase in energy will be lower than budgeted.
The deficit, according to the Wise Men, will be 1.6% of Gross Domestic Product (GDP) this year and 0.4% of GDP next year.
The debt will decrease from 67.4% of GDP to 63.5% of GDP next year. The Wise Men also warn that the energy crisis is not over and warn of the danger that next winter there may be price increases or even shortages.
Source: TSF
