Germany: No recession expected, experts say

Business Friday 07/April/2023 08:41 AM
By: DW
Germany: No recession expected, experts say

Berlin: Leading German economic institutes said on Wednesday that the German economy would likely grow by 0.3% this year, just avoiding a recession they predicted last fall.

They said, however, that inflation will ease only slightly to 6%, from 6.9% overall in 2022.

The forecast is more optimistic than that given by the German government itself, which recently upgraded its forecast to 0.2% growth after also predicting a recession following a surge in energy and food costs in the wake of Russia's invasion of Ukraine in early 2022.

The four institutes contributing to the forecast are the Ifo institute, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the RWI Leibniz Institute for Economic Research.

What reasons have been given for the improved forecast?
 "The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared," Timo Wollmershäuser from the Ifo institute said in a statement.

"The main reason for this is a smaller loss of purchasing power as a result of a significant drop in energy prices," he added.

A government relief package worth €200 billion ($218.9 billion), which also capped prices for gas and electricity, is believed to have played a role in the economy's better-than-expected performance as well, with relatively mild winter weather and Germany's attempts to diversify its gas supplies helping, too.

The country's economy, the largest in Europe, has also profited from the easing in supply chain problems and China's gradual dropping of many restrictions imposed during the coronavirus pandemic.

The researchers predicted an even stronger comeback in 2024, with growth of 1.5%. They said, however, that many uncertainties remained and warned against too much optimism.

 "The expected slowdown of the US economy, the fallout from recent financial market turmoil and the broader impact of monetary policy tightening" could yet "spoil the party", warned ING bank economist Carsten Brzeski.

The German statistics agency, Destatis, however, also came with good economic news on Wednesday, noting a jump of 4.8% in new factory orders in March over the previous month.

Inflation still a problem
The institutes did deliver one dampener by saying consumer prices were likely to stay high for the rest of the year.

 Government relief measures and expected high wage increases "are strengthening domestic demand and keeping domestic inflation high," they said in a statement.

"Only next year will this aspect of inflationary pressure also ease, bringing the inflation rate down noticeably to 2.4%," they said.

Germany's inflation rate eased to 7.4% in March after hitting a peak of 8.8% in late 2022.