RWI: Increased energy prices weigh on economic recovery in Germany

The RWI - Leibniz Institute for Economic Research lowers its forecast for German economic growth in 2022 to 2.5 percent due to the effects of the Ukraine crisis, and it expects 3.6 percent for 2023. In particular, the sharp rise in oil and gas prices is placing a heavy burden on companies and households. In contrast, positive impulses are coming from the easing of the Corona infection control measures. Overall, economic activity should expand again in the coming months. The unemployment rate is expected to be 5 per cent in 2022 and 4.9 per cent in 2023. Inflation is expected to be 5.2 per cent this year due to high energy prices and fall to 2.3 per cent next year. The government budget deficit is expected to fall to just under 89 billion euros this year, and further to just over 70 billion euros in 2023.

The most important facts in brief:

Due to the effects of the Ukraine crisis, the RWI has lowered its forecast for German economic growth in 2022 compared to December last year from 3.9 to 2.5 per cent. For 2023 it now expects 3.6 instead of 2.5 percent.

The forecast is based on the assumption that no further economic sanctions will be imposed on Russia and that Russian gas deliveries to Germany will continue at the same time. In addition, it is assumed that the number of new Corona infections will decline from the second quarter, that infection control measures will be largely lifted and that they will not be necessary again in the coming winter. Furthermore, it is assumed that the supply bottlenecks for raw materials and primary products will gradually disappear.

The currently rising energy costs are a burden on consumers and businesses. Among companies, energy-intensive manufacturing sectors are particularly affected, such as the chemical industry and the steel, paper and glass industries. The burdens will cause production to fall again already in the first quarter of this year and will continue in the following quarters. The effects of the war in Ukraine will also be felt in the service sector, but it should recover from the second quarter onwards due to relaxed infection control measures.

The labour market continues to be robust. In the course of the year, the number of employees subject to social insurance contributions should continue to rise strongly by almost 300,000. The number of marginally employed workers is also likely to increase again after the sharp declines of the past pandemic waves, although the increase in the minimum wage should in itself lead to a decline in marginal employment in favour of employment subject to social security contributions. The self-employed continue to suffer from the uncertainties of the pandemic. The unemployment rate is expected to be 5 per cent this year and 4.9 per cent next year.
Inflation is expected to be 5.2 per cent this year and fall to 2.3 per cent next year. This year, rising natural gas and crude oil prices will lead to higher heating and petrol costs, thus directly affecting consumer prices. This price increase is expected to ease only in the course of the year. Since no significant increases in collectively agreed wages are expected in the short term, there will probably be no wage-price spiral.

The government budget deficit is expected to be just under 89 billion euros this year, significantly lower than last year's 132 billion euros. Government revenues are expected to increase significantly as the economy continues to recover, while government spending will rise only slightly as many crisis-related measures are phased out. In 2023, the financing deficit is then expected to decline further to a good 70 billion euros.

The development of the global economy is also under the influence of the war in Ukraine and the sanctions imposed on Russia. As a result, the problems in the global supply chains will probably be solved more slowly than would otherwise have been expected. A gradual normalisation is nevertheless to be expected. In the emerging markets, the development is likely to remain heterogeneous. Fossil fuel exporting countries will continue to generate high revenues. On the other hand, the economy in the net oil and gas importing countries will be burdened by the high price increases. This also applies to countries that are particularly dependent on food imports from Ukraine and Russia, for example in North Africa and the Middle East. On average, the RWI expects world trade to grow by 4.7 percent this year and by 3.2 percent next year.

Regarding the further economic effects of the Ukraine crisis and other risks for the German economy, RWI head of economic research Torsten Schmidt says: "The war in Ukraine is putting a strain on the recovery of the German economy from the

Source: RWI Essen, Photo: Fotolia