Economic forecast sharply lowered
IW Institute: GDP could shrink by up to 0.5 percent
8/29/2023 1:03 am
Compared to many other countries, Germany’s economic prospects are particularly bleak. According to the IW Institute, Germany is suffering from a “shock-prone environment”. Instead of growth, there could now be a minus.
The employer-oriented Institute of the German Economy (IW Köln) has lowered its economic forecast significantly. The IW announced that the gross domestic product (GDP) in Germany would shrink by up to half a percent. In the spring, growth of a quarter of a percent was still expected. “The German economy is suffering from a shock environment,” it said. An end to the Russian invasion of Ukraine is currently not in sight. At the same time, tensions with China and the opaque geopolitical position of some emerging countries created risks in terms of access to raw materials and energy as well as effective global supply chains and important sales markets. The German economy is having a particularly difficult time in this environment.
Adjusted for inflation, exports are likely to shrink by one percent this year. The generally gloomy economic mood, high costs and rising interest rates are likely to cause construction investments to fall by three percent. Private consumption is also failing as an economic engine. This is mainly due to the high inflation: the rate of inflation is likely to be around 6.5 percent, similar to 2022 at 6.9 percent. “However, the significant wage increases, allowances and transfers counteract the loss of purchasing power to a large extent,” emphasized the institute. As a result, real consumer spending should only be around 1.25 percent below the previous year’s figure.
The economic slowdown is also having an impact on the labor market. “Companies are more reluctant to hire new staff,” according to the IW researchers. “Although no major layoffs are to be feared, the unemployed are finding it increasingly difficult to find new employment.” In addition, Ukrainian refugees have been registered as unemployed since the summer of 2022. As a result, the annual average number of unemployed increased by 160,000 to 2.58 million. The unemployment rate rose to a good 5.5 percent.
According to the forecast, two contrasting developments are making themselves felt in public finances: Due to the significantly dampened economic outlook, tax revenues are likely to be lower than previously forecast, while the state can expect lower costs for the electricity and gas price brakes on the expenditure side. The state deficit is likely to amount to 97 billion euros this year, or just under 2.5 percent of economic power. The debt ratio, in turn, will stabilize at 65 percent of GDP. “In view of the economic circumstances, the current national debt can be seen as manageable,” concluded the IW.