How is the economy doing?
IFO economist: “The global economy is stronger than expected”
By Leon Berent
November 9, 2023, 3:38 p.m
Listen to article
This audio version was artificially generated. More info | Send feedback
The economy in Germany is puzzling: in their annual report, economists warn of a permanent slump in growth. IFO economist Timo Wollmershäuser, on the other hand, believes recession scenarios are exaggerated. However, he agrees with the Council of Experts on some points.
According to the so-called economists, Germany is heading into a recession and will remain economically weak in 2024. In the annual report for the federal government presented on Wednesday, the Economic Advisory Council expects gross domestic product (GDP) to fall by 0.4 percent in 2023. The forecast therefore corresponds to the government’s forecast. “The economic recovery in Germany is being delayed,” say the top economists.
Timo Wollmershäuser, head of “economic research and forecasts” at the Munich IFO Institute, sees it a little differently: “I am currently much more optimistic about next year.” He does not share the Council of Experts’ justification for a weak global economy.
“Although the global economy has weakened this year, it has surprisingly weakened less than expected.” In the USA, for example, a full-blown recession was expected for a long time. This did not happen. “I think this danger is off the table. Inflation rates are falling quite sharply and quickly around the world. There will probably be the first interest rate cuts again in the spring of next year.”
Habeck expects higher growth than the council
For the coming year, Federal Minister of Economics Robert Habeck is also more optimistic than the economists: The Green politician expects GDP growth of 1.3 percent, while the Council only expects an increase of 0.7 percent.
According to the Council’s forecast, the cost of living in Germany is likely to rise by 2.6 percent in 2024, following an estimated inflation rate of 6.1 percent in the current year. By the end of 2024, private consumer spending will recover in view of real incomes rising again, according to the annual report: “The unexpectedly sluggish recovery of the global economy, especially in China, is likely to continue and will also slow down German exports in 2024.”
The Advisory Council expects “significant obstacles to growth” in the medium and long term. These obstacles have been apparent for many years and have not yet been adequately addressed. “Firstly, it is foreseeable that demographic aging will cause the proportion of 20 to 64-year-olds in the total population to fall and the domestic work volume to decline,” the report says.
Immigration as a solution
“This is likely to become noticeable in the second half of the decade,” agrees IFO expert Wollmershäuser. “I expect growth rates of around half a percent. Then the demographic change will take full effect.” The reason is that the working population will shrink massively. “One percent growth would be a real boom.” The solution to this could be higher immigration. With normal migration, the economists’ forecast is quite realistic.
The economists are also pushing for a long-term reform of the statutory pension insurance (GRV). The experts have in mind a dynamization of the retirement age, which is based on the foreseeable increase in life expectancy. The core elements of the reform should be the “linking of the statutory retirement age to future life expectancy, combined with a new form of supplementary, funded pension provision”. The experts did not give a specific number in the report.
According to the current rules, the age limit for the standard old-age pension without deductions will gradually be raised to 67 by 2031. Federal Labor Minister Hubertus Heil (SPD) has spoken out against a further increase. In his view, this would be at the expense of the younger generation who are retiring after the baby boomers.