RWI: German economic performance with cyclical dampener, but no deep recession

In its current economic forecast, the RWI - Leibniz Institute for Economic Research assumes that German economic output will increase by 1.8 percent this year. This is 0.7 percentage points more than expected in its forecast from September this year. For 2023, RWI forecasts a decline of -0.1 instead of 0.8 percent economic growth. For 2024, an increase of 1.9 per cent is expected. The unemployment rate will rise to 5.5 per cent in 2023 and fall slightly to 5.3 per cent in 2024. The inflation rate is expected to fall to 5.8 per cent next year and further to 2.5 per cent the year after next. The public budget deficit will fall to a good 96 billion euros this year. Next year it will rise to a good 105 billion euros, and in 2024 it will fall again to a good 54 billion euros.

The most important facts in brief:

- In its current economic forecast for 2022, RWI expects German gross domestic product (GDP) to increase by 1.8 per cent, 0.7 percentage points more than in its forecast from September this year. For 2023, the RWI now expects GDP growth of -0.1 percent instead of 0.8 percent. For 2024, the institute lowers its forecast from 2.6 percent to 1.9 percent economic growth.

- The German economy proved to be surprisingly robust at the end of the year. In the third quarter, economic output expanded quite significantly. Private consumption and investments in equipment were the main contributors to this. Private consumption seems to be supported by the fact that households are liquidating savings built up during the Corona crisis, for example to catch up on holiday trips.

- In the winter half-year, private consumption is likely to decline. For private households in particular, financial burdens continue to increase. Although the burdens from high gas and electricity prices are less severe than expected in the summer due to the relief measures adopted by the government. However, rising consumer prices will cause real disposable incomes to fall sharply again. From the second quarter of 2023, real consumption should then pick up again strongly. Then, after the heating period, the acute phase of the energy crisis for households should be over and consumer prices should also fall.

- The labour market developed robustly in the third quarter of 2022. However, the increase in employment has slowed down recently. Economic uncertainties are reducing companies' willingness to hire, and energy-intensive companies are again sending some of their staff on short-time work. However, labour shortages and a lack of skilled workers should ensure that the predicted recession in the winter half-year will not result in a particularly sharp rise in unemployment. The annual average unemployment rate is expected to be 5.3 per cent in 2022, rising to 5.5 per cent next year and back to 5.3 per cent in 2024.

- The drastic increase in the price of electricity and gas has pushed up consumer prices sharply this year. However, the slight decline in the inflation rate from 10.4 per cent in October to 10 per cent in November could mean that inflation peaked at the end of the year. The electricity and gas price brake is expected to reduce the increase in consumer prices by significantly more than one percentage point in the coming year. Overall, price inflation is expected to fall from 7.9 per cent this year to 5.8 per cent next year and 2.5 per cent in 2024.

- Government revenues develop robustly over the forecast period and remain roughly constant relative to GDP. Revenue from corporate taxes has been surprisingly high so far in 2022 and is expected to remain high. Government spending is expected to increase moderately in 2022, although Corona-related spending, especially corporate aid, will be eliminated to a large extent. Aid payments, however, are likely to remain at elevated levels over the forecast period compared to the pre-Corona years, as money flows to businesses and households to mitigate high energy prices. The public budget deficit is expected to decline to a good 96 billion euros in the current year. Next year it should rise to a good 105 billion euros, and in the year after next it should fall sharply to a good 54 billion euros.

Source: RWI Essen