IfW expects more growth – Ifo a winter recession

IfW expects more growth – Ifo a winter recession

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Every tenth more inflation would harm the economy.

(Photo: IMAGO/blickwinkel)

Berlin Will the German economy grow or shrink this year? Leading research institutes are divided on this issue. The Institute for the World Economy (IfW) raised its growth forecast for 2023 from 0.3 to 0.5 percent on Wednesday.

In contrast, the Munich Ifo Institute stuck to its forecast from December, according to which gross domestic product will fall by 0.1 percent. For comparison: the federal government has so far assumed growth of 0.2 percent, after an increase of 1.8 percent last year due to corona catch-up effects.

“The economic compass is pointing upwards again, but the upward momentum remains subdued,” said Stefan Kooths, chief economic officer of the IfW. Easing material bottlenecks are likely to contribute to the upward trend, and growth should also be sufficient in the current first quarter.

In contrast, the Ifo Institute sees the largest economy in Europe in a winter recession. “The German economy has been shrinking since the end of last year,” said Ifo economic researcher Timo Wollmershäuser. In the current first quarter, however, the minus of 0.2 percent will only be half as large as last time.

“From the middle of the year at the latest, rising real wages will support the domestic economy,” said Wollmershäuser. Both institutes expect growth for 2024. The IfW of 1.4 percent, the Ifo even 1.7 percent.

Institutes: inflation stays high

Both institutes are not giving the all-clear on inflation. “Price inflation will probably remain stubbornly high for some time to come,” say the Kiel researchers. Accordingly, consumer prices will rise by 5.4 percent this year, and then by 2.1 percent in 2024.

Definition: What is a recession?

Inflation last year was 6.9 percent. “The high inflation reduces the disposable income of private households and leads to a decline in private consumer spending in the current year,” says the IfW.

A “noticeable loss of purchasing power” of 1.8 percent is emerging. “I think we have now reached the peak of the inflation wave,” said Ifo expert Wollmershäuser. This is due to lower energy prices, for example. However, the sharp increase in wages is causing new price pressure.

The Kiel experts do not see any major impetus for the European export champion from the global economic side. “However, given the easing of supply bottlenecks, companies in the manufacturing sector can start working off their previously accumulated order backlogs, even if the persistently high energy prices are weighing on the energy-intensive sectors.” Construction investments, on the other hand, are likely to fall due to the poorer financing conditions as a result of higher interest rates.

situation on the labor market

“The labor market remains robust despite the economic downturn,” writes the IfW. The unemployment rate is likely to remain at a good five percent, and the number of people in work this year will rise by almost 300,000 to more than 45.7.

However, the consequences of demographic change are likely to become increasingly apparent. “Employment will peak in the coming years,” warns the IfW. “In view of the high inflation, the massive shortage of skilled workers will lead to strong wage increases.”

According to the Ifo spring forecast, the state budget will initially be in the red. The deficit is expected to be 1.3 and 0.3 percent of economic output this year and next. The government financing deficit would thus be significantly lower than expected in December.

“In particular, the expenditures that were estimated for the state energy price brakes were reduced by a total of a good 35 billion euros because, from today’s perspective, the procurement prices for electricity and gas in the forecast period are lower than expected,” it says.

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