German economy forecast to shrink 0.4 pct in 2023

Europe Materials 30 September 2022 04:48 (UTC +04:00)
German economy forecast to shrink 0.4 pct in 2023

Germany is set to enter a recession in 2023, with a decline in gross domestic product (GDP) of 0.4 percent, according to a joint forecast published by leading economic institutes in the country, Trend reports citing Xinhua.

In the spring, the institutes were still predicting that Europe's largest economy would grow by 3.1 percent. However, the new forecast "mainly reflects the extent of the energy crisis," according to RWI Leibniz Institute for Economic Research, the Halle Institute for Economic Research (IWH), the Kiel Institute for the World Economy, and the ifo Institute.

A "significant part" of Germany's gas supply has been lost since the start of the Russia-Ukraine conflict, increasing the risk that "remaining supply and storage volumes will not be sufficient to meet demand during the coming winter."

Gas prices in Europe have tripled, since Russian supplies to Germany via the Nord Stream 1 pipeline have been repeatedly reduced, and finally stopped altogether. After explosions caused four major gas leaks at both Nord Stream 1 and 2, the situation is unlikely to resolve quickly.

To secure its supply, Germany has been seeking new trade partners, and is also ramping up its use of coal and nuclear power. Despite the planned nuclear phase-out at the end of the year, Minister for Economic Affairs Robert Habeck has retained the option of operating two nuclear power plants in the first quarter of 2023.

Driven by skyrocketing energy prices, inflation in Germany jumped to a new record of 10 percent in September, according to preliminary data from the Federal Statistical Office (Destatis). Rising producer prices and continuing supply chain interruptions caused by the COVID-19 pandemic have further fueled consumer prices.

Inflation in Germany is expected to rise even further in the coming months, before averaging 8.8 percent next year, according to the joint forecast. The European Central Bank's target inflation of around 2 percent will not be reached before 2024.

"Although the situation is expected to ease somewhat over the medium term, gas prices are likely to remain well above pre-crisis levels," the institutes said, warning that "this will mean a permanent loss of prosperity for Germany."

(1 euro = 0.97 U.S. dollar)