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1. German Economy in Winter 2023: Public budget under stress – Recovery faces headwinds

Author:
Jens Boysen-Hogrefe, Dominik Groll, Timo Hoffmann, Nils Jannsen, Stefan Kooths, Nils Sonnenberg, and Vincent Stamer
Publication Date:
12-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The German economy is struggling to emerge from stagnation. GDP is likely to increase again in 2024, but the economic momentum will remain low. The strong growth in real disposable income will boost private consumption. However, the increases in interest rates continue to weigh on construction investment and there are no signs of large impulses from the world economy ahead. Moreover, the fiscal consolidation because of the Federal Constitutional Court's judgement on the supplementary budget for 2021 will slow economic expansion. There is uncertainty regarding the exact structuring of the reductions in expenditure as well as their economic impact. In the forecast, the additional savings will reduce growth in GDP by around 0.3 percentage points in 2024. Overall, we now expect GDP to increase by 0.9 percent in the coming year and thus at a slower pace than in our autumn forecast (1.3 percent). In 2025, economic output is likely to increase by 1.2 percent (autumn forecast: 1.5 percent). The decline in the current year of 0.3 percent will be slightly lower than expected in the autumn (-0.5 percent). Inflation has fallen significantly. For the next two years, we expect rates of 2.3 percent (2024) and 1.8 percent (2025), after 5.9 percent in the current year. The low economic momentum is leaving its mark on the labour market. However, demographic change and the associated shortage of skilled labour are counteracting this. The government's financing deficit is expected to fall from 2.5 percent relative to GDP in 2022 to 0.7 percent in 2025. The debt level will fall from 66.1 percent to 62.4 percent in the same period.
Topic:
Monetary Policy, GDP, Economy, Business, Energy Crisis, and Emerging Economies
Political Geography:
Europe and Germany

2. German Economy Summer 2022: Slowly progressing recovery

Author:
Jens Boysen-Hogrefe, Nils Jannsen, Saskia Meuchelbock, Dominik Groll, Stefan Kooths, and Nils Sonnenberg
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The German economy navigates troubled waters. The catch-up process in the contact-intensive service industries is continuing at a fast pace and companies in the manufacturing sector are sitting on well-filled order books. However, high inflation is reducing the purchasing power of disposable incomes and thus dampening the recovery in consumption. In addition, supply bottlenecks have recently worsened again due to the war in Ukraine. As a result, the recovery will regain strength only in the second half of the year, when prices will no longer rise as rapidly and supply bottlenecks will begin to ease. Overall, we expect GDP to increase by 2.1 percent this year, as in our spring forecast. In 2023, GDP will grow by 3.3 percent (spring forecast: 3.5 percent). At 7.4 percent, inflation in the current year will be higher than ever before in reunified Germany. Next year, inflation will probably remain high with 4.2 percent. The recovery in employment continues. Effective earnings will rise strongly, also because labor shortages have reached an all-time high. In the current year, however, the increase of about 5 percent will lag behind the rate of inflation. Public budget deficits will decline as revenues increase strongly and pandemic-related expenditures are reduced. In 2023, public debt in relation to GDP is expected to be slightly above 60 percent.
Topic:
Economics, GDP, Inflation, and Russia-Ukraine War
Political Geography:
Europe and Germany

3. German Economy Spring 2022: Recovery at risk – Soaring Inflation

Author:
Jens Boysen-Hogrefe, Nils Jannsen, Saskia Meuchelbock, Jan Reents, Dominik Groll, Stefan Kooths, Martin Ademmer, and Nils Sonnenberg
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The German economy is once again facing strong headwinds. The war in Ukraine is leading to rising commodity prices, new supply bottlenecks and dwindling sales opportunities. These factors will affect the German economy in different ways. Higher commodity prices reduce the purchasing power of disposable incomes and thus dampen private consumption. Moreover, new supply bottlenecks will dampen industrial production in the coming months. Finally, sales opportunities will deteriorate at least temporarily due to the sanctions and the increased uncertainty caused by the war. All this is hitting the economy in a phase in which the dampening effects of the pandemic are fading out and a strong recovery has begun to emerge. The dampening factors are cushioned because private households have accumulated large amounts of extra savings since the beginning of the pandemic, so that high inflation does not fully impact private consumption. In addition, industrial firms have an unusually high stock of orders, which will cushion the temporarily lower sales opportunities. As a result, the recovery is likely to continue this year, albeit at a noticeably slower pace than expected in winter. Overall, we now expect GDP to rise by 2.1 percent in this year (winter forecast: 4 percent) and by 3.5 percent in 2023 (winter forecast: 3.3 percent). With 5.8 percent inflation is likely to be higher this year than ever before in reunified Germany. Even if commodity prices stop rising and supply bottlenecks gradually ease, inflation is still likely to be unusually high at 3.4 percent next year, also because recent producer price increases are only gradually being passed through to consumers. The labor market is expected to remain robust. Public spending will rise in response to the war and its economic consequences, so that budget deficits will remain at elevated levels for a longer period.
Topic:
Economics, GDP, Inflation, and Purchasing Power
Political Geography:
Europe and Germany

4. German Economy Winter 2021: Recovery temporarily on hold

Author:
Martin Ademmer, Dominik Groll, Nils Jannsen, Saskia Meuchelbock, Jens Boysen-Hogrefe, Nils Sonnenberg, and Stefan Kooths
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The recovery of the German economy is interrupted once again. In the winter, the new Covid-19 wave will particularly hit activity in contact-intensive service sectors as in previous waves. As a result, there will be a setback in private consumer spending and probably also small declines in GDP. To the extent that the burdens of the pandemic ease in the spring, a strong recovery will set in, similar to the pattern observed this year. Economic momentum will likely be particularly high as the supply bottlenecks, which are massively dampening industrial production in this year, are expected to ease. Overall, the renewed slowdown in the recovery process caused by the pandemic will probably be larger than we had expected in our autumn economic outlook. However, the setback will be not as severe as last winter. In 2022, GDP will probably increase by 4 percent and thus less strongly than we had expected three months ago (5.1 percent). For 2023, we revise GDP growth upwards to 3.3 percent (autumn outlook: 2.3 percent). This year, GDP will increase by 2.6 percent. Inflation will remain high for the time being, also because supply bottlenecks continue to increase manufacturing costs and tighten the supply of consumer goods. At the same time, private households have accumulated additional savings of around 200 billion euros since the beginning of the pandemic and therefore have a rather high willingness to pay. Consumer price inflation will probably be around 3 percent both this and next year, before easing again in 2023. The public budget deficit will fall noticeably from 3.8 percent in relation to GDP in 2021 to 1.8 percent in 2022 due to the reduced burden of the pandemic. However, the budgets are still expected to close with a deficit of 1.4 percent in 2023.
Topic:
Economics, GDP, Pandemic, and COVID-19
Political Geography:
Europe and Germany