German economic growth forecasts downgraded due to war in Ukraine

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By Maria Martinez

The German economy is traversing difficult waters and facing the highest inflation rates in decades, a group of German economic research institutes said in a joint report.

The group of institutes, including the ifo institute, lowered its growth outlook for this year to 2.7% from 4.8%. For 2023, they predict GDP growth of 3.1%.

The war in Ukraine and the worse than expected development of the pandemic during the last winter semester, according to the report.

“The recovery from the Covid-19 crisis is slowing due to the war in Ukraine, but remains on track,” the economic institutes said in their spring report.

However, the cumulative loss of GDP in 2022 and 2023 in the event of a supply freeze from Russia is expected to be around 220 billion euros ($238.2 billion), or more than 6.5% of annual economic output.

“If the gas supply were to be cut off, the German economy would suffer a deep recession,” said Stefan Kooths, vice president and research director for business cycles and growth at the Kiel Institute for Economics. worldwide, in the report.

The disappearance of pandemic restrictions is supporting service sectors while persistent supply chain bottlenecks in the wake of the Covid-19 crisis are still disrupting manufacturing output, Mr Kooths said.

“Shockwaves from the war in Ukraine are weighing on economic activity on both the supply side and the demand side,” he said.

Government stimulus packages during the pandemic have already had an inflationary effect and rising prices for essential energy products following the Russian invasion are further fueling upward pressure on prices, Mr Kooths said.

Due to the high level of uncertainty regarding energy supplies from Russia, the institutes calculated two scenarios in their spring report. The base scenario assumes gas deliveries and no further economic escalation following the war in Ukraine. The adverse scenario assumes a sudden stoppage of Russian energy supply.

In the base scenario, Germany’s GDP increases by 2.7% in 2022, and in the event of an energy supply interruption by only 1.9%. In 2023, GDP is expected to grow by 3.1% and contract by 2.2% in the event of a supply disruption.

The inflation forecast is 6.1% in 2022, the highest rate for 40 years. In the event of an interruption of the energy supply, it would even rise to 7.3%, a record in post-war Germany. Next year’s rate of 2.8% will also remain well above the average since reunification.

According to the base scenario, the unemployment rate will drop from 5.7% in the previous year to 5.0 in 2022 and 2023. The adverse scenario foresees 5.2% in 2022 and 6.0% in 2023.

The public deficit is expected to narrow significantly as pandemic budget support expires, government revenues rise in the wake of the recovery and additional funds for climate protection and defense are expected to be slowly depleted, the officials said. German institutes. According to forecasts, the deficit will fall to 52.2 billion euros for the current year and to 27.9 billion euros for the coming year.

The forecasts were prepared by the German Institute for Economic Research (DIW Berlin), the ifo Institute (Munich), the Kiel Institute for the World Economy (IfW Kiel), the Halle Institute for Economic Research ( IWH) and RWI (Essen).

Write to Maria Martinez at [email protected]

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