RWI: Consumption pulls German economy back into positive territory next year

RWI - Leibniz Institute for Economic Research lowers its forecast for German economic growth in 2023 from 0.2 to -0.3 per cent, and expects 2.0 per cent for 2024. How quickly the German economy recovers depends primarily on how quickly inflation declines and, as a result, private consumption picks up again. The unemployment rate is expected to be 5.6 per cent in 2023 and 5.4 per cent in 2024. Inflation should be 5.5 per cent this year and fall to 2.0 per cent next year. RWI expects a government budget deficit of a good 50 billion euros for the current year and a deficit of just under 18 billion euros for 2024.

The most important facts in brief:

• RWI lowers its forecast of German economic growth for 2023 by 0.5 percentage points compared to March this year, from 0.2 to -0.3 per cent. For 2024 it expects 2.0 instead of 1.8 percent.
• Overall economic demand in Germany is currently weak. This is mainly due to a sharp decline in private household consumption. Due to the high inflation at the beginning of the year and the associated decline in real incomes, households restricted their consumption. As the year progresses, household consumption expenditure is expected to rise again as inflation falls.
• Easing problems with supply chains have apparently allowed companies to work off backlogged orders. Accordingly, equipment investment expanded quite significantly in the first quarter of this year. It is expected to increase by a total of 3.6 per cent this year and by 2.7 per cent next year due to worsening financing conditions.
  The labour market started the year with strong employment growth, with a seasonally adjusted gain of 150,000 workers in the first quarter. The positive development was mainly driven by immigration, with the largest increases recorded in employment subject to social security contributions. However, the latest labour market indicators point to a turnaround.
• Due to the weak economy, registered unemployment has risen and is expected to peak in the second quarter of 2023. This year, the unemployment rate is expected to rise to 5.6 per cent, then fall again to 5.4 per cent next year.

• In the case of collective wage agreements, large increases are set for the further course, since, among other things, in weighty areas such as the public sector, new collective wage agreements include quite high rates and, above all, extensive one-off payments as part of the inflation compensation premium. High wage increases are expected over the entire forecast period, while inflation is gradually easing. Consequently, real wages, which have fallen recently, are expected to start rising again from the second half of this year. Over the years 2023 and 2024, collectively agreed earnings are expected to increase by 4.8 per cent and 4.6 per cent respectively, while effective earnings (the gross earnings actually paid by employers to employees, which in addition to collectively agreed earnings also include benefits above the collectively agreed level) are expected to increase by as much as 5.9 per cent and 5.0 per cent respectively.

• Since the beginning of the year, the year-on-year increase in consumer prices has slowed from 8.7 per cent to 6.1 per cent. This is due, among other things, to the fact that energy prices have hardly contributed to inflation since the introduction of the electricity and gas price brake at the beginning of the year. For this year, RWI expects an inflation rate of 5.5 per cent, for 2024 a rate of 2.0 per cent.

• The government budget deficit is expected to be significantly lower this year at a good 50 billion euros than last year's 106 billion euros. Government revenues will increase only moderately, especially because tax revenues are weak. Government expenditure is also expected to increase only weakly. In 2024, the general government deficit is expected to fall to just under 18 billion euros, and both government revenues and expenditures are expected to be higher than this year

Regarding the outlook for the German economy, RWI head of economic research Torsten Schmidt says: "The economic recovery depends on inflation falling as predicted and private consumption picking up as a result. If this is not the case, GDP could decline even further."

Source: RWI, Photo: Fotolia