Berlin The high point of inflation has not yet been reached: According to estimates by the Ifo Institute, the rate of inflation will rise to eleven percent at the beginning of next year. This emerges from the economic forecast presented by the institute on Monday. In 2023 as a whole, inflation is expected to be 9.3 percent.
“The German Economy is facing a hard winter,” said Ifo economic chief Timo Wollmershäuser. Germany I’m facing a “wave of price hikes”. The energy suppliers noticeably adjusted their electricity and gas prices to the high procurement costs at the beginning of next year. Inflation is also the main reason why the German economy is expected to shrink in the coming year.
Like the Kiel Institute for the World Economy (IfW) and the Halle Institute for Economic Research (IWH) before them, the Ifo is expecting a recession. However, the people of Munich are a little more optimistic and only expect a minus of 0.3 percent for the coming year.
According to the economists, high inflation is causing private household consumption to fall sharply. That is the main reason for the economic downturn. “Inflation will be the key driver of the economy,” says Wollmershäuser. For the current year, the Ifo still expects growth of 1.6 percent. The inflation rate is expected to be 8.1 percent.
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Overall, it is becoming increasingly clear that the current economic difficulties resulting from the Ukraine war will damage Germany as a business location for a long time to come. “This crisis is costing us a great deal of prosperity, and that in the long term,” explains Oliver Holtemöller, head of economic activity at IWH.
Companies are no longer profitable due to the crisis
The reason is that energy imports have become immensely expensive. According to the IfW, the German bill for fossil energy imports this year and next will be 260 billion euros higher than before the war. Households spend more money on gas and electricity, and most of these funds flow abroad. The German economy is getting poorer.
The energy crisis is also making business models superfluous, as companies are no longer profitable – the lack of growth now cannot simply be made up for in the future, as was the case after the corona crisis. At that time, Germany was hit by a shock that did not fundamentally change most of the basic economic conditions. The only decisive factor for the economy was therefore how quickly the German economy caught up with the effects of the shock.
This difference is also reflected in the forecasts. “Germany is facing lean years,” says IfW economic chief Stefan Kooths. His institute, for example, only expects economic growth of 0.7 percent in 2027, assuming that production is running at normal capacity.
It was expected that the potential of the German economy would decline due to the falling number of workers due to demographic change. “In addition, energy resources have become scarcer and more expensive as a result of the war in Ukraine,” explains Kooths. “This also reduces Germany’s economic power.”
How much prosperity the current crisis is costing is difficult to determine because it is not so easy to separate from other effects such as supply bottlenecks. What is clear, however, is that most of the expected losses can be attributed to the energy crisis. Ultimately, the loss of prosperity will probably be at least in the three-digit billion range this year and next alone.
This is shown by comparing the institutes’ economic forecasts from winter 2021 with today’s. The institutes have now revised their forecasts for this year and next to such an extent that in the case of the Ifo analysis around 190 billion euros in added value in Germany are lost. The IfW’s estimate of a loss of 240 billion euros is even more extreme.
Politics can do little to change that. It can organize alternative sources of energy and thus try to slow down the price increase. This can mitigate the loss of prosperity somewhat, but cannot prevent it. Politicians can, however, determine who bears what share. “We have to take action against an impending recession and high inflation,” says Green Party Vice President Andreas Audretsch.
Ifo economist Wollmershäuser explains: “We as a society have to pay for this loss that we accept.” Not only the energy suppliers, but also the citizens have to bear part of the burden of the high energy prices. It is therefore correct that wages are rising less than inflation.
Economy has to bear its share of the burden
“We will have strong wage increases, but they will by no means offset the rise in inflation,” explains Wollmershäuser. According to the Ifo, the loss of purchasing power measured by the decline in real wages this year and next will be higher than at any time since records began in 1970. The institute does not expect real wages to rise again until the end of 2023.
At the same time, the economy has to do its part. Wollmershäuser emphasizes that this will particularly affect energy-intensive industry. “We have to reckon with the fact that one or the other company will not survive this crisis.”
Wollmershäuser doesn’t want to hear anything about Cassandra calls. “The only sector in which the business climate has not collapsed is German industry,” he said.
In view of the high energy prices, Wollmershäuser expects weak development but no slump in industry. On the one hand, he sees the reason for this in the backlog of orders that many companies still have. On the other hand, some industries could pass the increased energy costs on to customers. “The German economy has already coped with other crises.”