Economic Forecast Summary Germany – June 2023


The economy is projected stagnate in 2023 and grow by 1.3% in 2024. High inflation is reducing real incomes and savings, damping private consumption. Export growth will recover through 2023 due to easing supply chain bottlenecks and a record-high order backlog. Investor and consumer confidence have improved due to strong energy price support, swift substitution of energy imports from Russia and declining energy prices. Investment will pick up, despite rising interest rates, mainly due to high corporate savings and investment needs related to the relocation of supply chains and renewable energy expansion, rising public investment and strong fiscal incentives for green investments.

The fiscal deficit will be reduced in 2023 and 2024. To contain inflationary pressures, it is essential to avoid an expansionary fiscal stance. Improving infrastructure planning, approval processes and capacity, particularly at the municipal level, would accelerate the energy transition and digitalisation. Skilled labour shortages should be addressed by raising the labour supply of women, older and low-skilled workers, improving training and adult learning, and facilitating the recognition of the qualifications of migrants and refugees.

Germany 1

Source: Federal Statistical Office; ifo business surveys; and GfK.

Germany: Demand, output and prices

Germany Demand, output and prices

High inflation weighs on private consumption

The economy entered a recession over the winter. GDP declined by 2.1% (seasonal adjusted annual rate) in the fourth quarter of 2022 and 1.2% in the first quarter of 2023, mainly due to a drop in private consumption. High inflation has reduced real wages, which were down by 5.4% in the fourth quarter of 2022 compared to a year earlier. Heightened uncertainty, high energy prices and material shortages weighed on manufacturing and investment. However, since early 2023, easing supply chain bottlenecks and a large export order backlog have led to a pick-up in industrial production, investment and exports. Business investment increased by 12.7% (seasonally adjusted annual rate) in the first quarter of 2023. Reduced energy prices have particularly benefitted energy-intensive industries, with production rising by 3.3% from January to March. After picking up strongly in January and February, export orders have slumped in March, but the export order backlog is still at an equivalent of about 7.4 months of production at full capacity. Investor and consumer confidence have recovered since late 2022, but business expectations deteriorated in May. However, real retail sales have increased by 0.8% in April compared to March. Headline inflation decreased to 6.3% in May compared to a year earlier, down from 7.6% in April, but core inflation is still on the rise. The unemployment rate fell to 2.8% in March.

Germany 2

  1. Harmonised index of consumer prices.

  2. Harmonised index of consumer prices excluding food, energy, alcohol, and tobacco. Source: Federal Statistical Office; and Eurostat.

Before the start of Russia’s war of aggression against Ukraine, Germany was highly dependent on Russian gas, oil and coal, with around one-third of primary energy supply coming from Russia. Since then, energy imports from Russia have strongly declined due to the EU coal and oil embargo, the destruction of gas pipelines, and the rapid diversification of energy suppliers. In February 2023, less than 1% of German energy imports still came from Russia. Despite high gas storage levels and the opening of three LNG terminals since December 2022, gas consumption will need to be reduced by around 20% to prevent significantly higher gas prices or shortages if temperatures are below average next winter. The war has led to a net inflow of about 1 million refugees from Ukraine by February 2023 (1.3% of the population).

Energy price measures and public investment will support the recovery

Electricity and gas price subsidies, which have maintained energy saving incentives, and the rapid construction of LNG terminals have helped to lower wholesale energy prices and increased investor and consumer confidence. Three relief packages estimated at EUR 95 billion (2.6% of GDP) and an energy support fund of EUR 200 billion (5.5% of GDP) were put in place. Besides some permanent policy changes in line with earlier government plans, the relief packages include various temporary measures to support real incomes. The debt-financed energy support fund will finance liquidity support, equity injections and grants for firms as well as the subsidy of electricity and gas bills until December 2023, with an option to prolong it until April 2024. Excluding permanent policy measures that are not related to the energy crisis as well as equity injections, total energy price support was planned at about 2.4% in 2023, and 0.6% in 2024. However, falling retail energy prices resulting from lower wholesale prices, as observed since December 2022, will likely reduce the fiscal costs by about 1% in 2023 and 0.5% in 2024. This will lead to a contractionary fiscal stance in 2023 and 2024.

To reach its ambitious climate targets, the government plans to spend around EUR 200 billion (5.5% of GDP) until 2026, with fiscal incentives to crowd in private investments playing a major role. It also envisages a significant increase in military spending of EUR 100 billion over the next few years to upgrade military equipment. Most of these investments as well as the energy support fund will be financed through extra-budgetary funds, the spending of which is excluded from the national debt brake that is planned to be reinstated from 2023. Capacity constraints in the construction sector and long and complex planning and approval procedures will likely slow the disbursement of funds.

The economy will slowly recover

The economy is projected to stagnate in 2023 and grow by 1.3% in 2024. GDP growth will be subdued in 2023 as high inflation reduces real incomes and savings and holds back private consumption. The recovery will be driven by exports due to easing supply chain bottlenecks and a large export order backlog. Rising interest rates and uncertainty amidst energy price volatility will weigh on investment, particularly in housing, but strong government support and lower energy prices will further improve investor confidence. Investment will pick up due to high corporate savings and investment needs related to the relocation of supply chains and the renewable energy expansion, rising public investment and fiscal incentives for green investments. Inflation is projected to remain high in 2023 due to the pass-through of energy and producer prices to consumers and rising wage pressures. Tighter monetary conditions, fading energy price pressures and fiscal tightening will help to bring down inflation to 3.0% in 2024. Real wages will rise in 2024, supporting a recovery of private consumption.

A major downside risk arises from gas prices and potential gas rationing next winter. This would imply severe production disruptions if planned fiscal support measures do not sufficiently preserve price incentives for gas savings, weather conditions are unfavourable, and delays occur in building up the LNG infrastructure. Geopolitical tensions could lead to further trade disruptions and the need to relocate supply chains. Moreover, rising interest rates could cause strong corrections in housing markets, affecting financial markets, as well as lower export demand for investment goods. On the upside, a quicker end to the war in Ukraine could restore investor and consumer confidence and lower energy prices.

Expand renewables to raise energy security

To expand renewable energy supply, it is crucial to continue accelerating complex planning and approval procedures at the municipal and Länder level. Speeding up the digitalisation of the economy requires more investments in digital infrastructure, a more rapid modernisation of the public sector and better coordination of policies and administrative procedures across levels of government. Increasing the efficiency of public spending by effective use of spending reviews, reducing regressive and environmentally harmful subsidies and tax exemptions, and improving tax enforcement could free up additional resources for necessary public investment. To address rising labour shortages, which also risk derailing private and public renewable energy investment, the labour market participation of women, low-skilled and elderly workers need to be raised by setting the right tax incentives and improving training and adult learning policies. Reforming the current joint income taxation of couples would help to raise female labour supply and reduce gender imbalances.


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