RWI: High inflation delays recovery of German economy

RWI lowers its forecast of German gross domestic product (GDP) for this year from 2.5 to 1.9 per cent compared to March this year. For 2023, it now expects 2.7 instead of 3.6 percent. The economic recovery is being held back in particular by the sharp rise in inflation and the supply bottlenecks that are increasing again.
Private consumption should contribute to a revival of domestic demand. The sharp rise in prices has indeed significantly worsened the mood of private households. However, the withdrawal of government infection control measures is likely to revive consumer services in particular. This is already clearly evident in tourism and the hospitality industry.

The strong recovery in the labour market continues. Almost the entire increase comes from employment subject to social security contributions. Strongly rising employment figures are expected throughout the year, also due to the integration of highly qualified refugees from Ukraine. At the same time, the record number of reported job vacancies, among other things, indicates that the shortage of skilled workers in Germany is intensifying. The unemployment rate is expected to be 5 per cent this year and 4.9 per cent next year.

The coming increase in the minimum wage to 12 euros is expected to have little overall impact on employment. However, it will cause structural changes in the forms of employment because it will become somewhat less attractive for companies to hire mini-jobbers than employees subject to social security contributions, although the increase in the mini-job limit associated with the reform will slightly counteract this effect.

It is true that wages have recently risen more strongly than on average in recent years. At the same time, however, inflation rose sharply and the cost of living increased accordingly. As a result, workers across Germany have had to accept falling real wages. It is also not to be expected that future wage increases in the forecast period will keep pace with the inflation rate, so that no wage-price spiral is currently emerging. Collectively agreed wages are expected to rise nominally by 2.6 per cent in 2022 and by 3.6 per cent in 2023. Consumer price inflation remains high in Germany.

In May, prices rose extraordinarily strongly, probably by 7.9 per cent compared to the previous year. Energy and some foodstuffs, such as edible fats and oils, have become particularly expensive. But the prices of many other goods and services are also rising more strongly than before. This process is likely to weaken only gradually. The gradual increase in interest rates by the European Central Bank (ECB) should also gradually contribute to a weakening of price increases. Overall, prices will probably rise by 6.9 per cent on average this year. Next year, inflation will fall to 2.6 per cent on average for the year.

The public budget deficit is expected to be a good 53 billion euros in 2022, having been 131 billion euros in 2021. In percentage terms, government revenues are likely to increase only slightly more than the gross domestic product. An even stronger increase is counteracted, among other things, by measures to deal with the rise in energy prices - such as the temporarily lowered energy tax and the higher basic personal income tax allowance. Absolute government spending, on the other hand, is more or less stagnating. They are increased, among other things, by transfers to employed persons and benefit recipients, namely the energy price flat rate and the heating cost subsidy, as well as the subsidy of public transport through the 9-Euro-Ticket. However, the expenditure related to the Corona crisis decreases sharply at the same time. In 2023, the financing deficit is then expected to fall further to just under 36 billion euros.

Source: RWI Essen, Photo: Fotolia