IFO and IMK lower GDP forecast
“It’s not just in German football that things aren’t going well”
06/21/2023 11:46 am
The leading German economic researchers do not expect any growth this year. Consumers are being hit too hard by the high inflation – private consumption is no longer the driving force. However, the weaker increase in consumer prices should ease the situation in the second half of the year.
In view of the loss of purchasing power of consumers due to high inflation, other institutes are more pessimistic about the German economy. The gross domestic product is likely to fall by 0.4 percent more sharply this year than the minus 0.1 percent forecast in the spring, predicted the Munich IFO Institute in its summer forecast. At the same time, the growth forecast for the coming year was cut back from 1.7 to 1.5 percent. “It’s not just in German football that things aren’t going well at the moment,” said IFO economics chief Timo Wollmershäuser in Berlin in view of the national team’s series of defeats led by national coach Hansi Flick. “There are also a number of problems with the German economy.”
The Institute for Macroeconomics and Business Cycle Research (IMK), which is close to the trade unions, assesses the situation and prospects even more pessimistically. Economic output is expected to shrink by 0.5 percent this year and only grow by 1.2 percent in 2024.
“The German economy is only working its way out of the recession very slowly,” said IFO economic chief Wollmershäuser. Unlike its most important trading partners, Europe’s largest economy slipped into this in the winter half-year, in which gross domestic product shrank for two consecutive quarters. “We’re clearly the bottom,” the economist drew another parallel to football.
Purchasing power is likely to increase
The experts from IFO and IMK expect consumer prices to relax. The inflation rate will slowly fall: from 6.9 percent in 2022 to 5.8 percent this year and then to 2.1 percent in 2024, the Munich researchers expect. “In the second half of the year, wages are likely to increase more than prices,” said Wollmershäuser. That supports the economy. Due to the current high level of inflation, which in some cases means significant losses in purchasing power for many consumers, private consumption is likely to fall by 1.7 percent this year. “It will only increase again in 2024, by 2.2 percent,” said Wollmershäuser.
Because of the sharp inflation, the European Central Bank (ECB) has raised its key interest rate eight times in a row to currently 4.00 percent. With regard to the ECB’s monetary policy, the scientific IMK director Sebastian Dullien spoke out in favor of restraint with further interest rate increases. “Since inflation is foreseeable moving in the direction of the ECB target of two percent, but at the same time the strong interest rate increases of the past few months will only unfold their full effect with a time lag, the ECB should now take a break with its interest rate hikes and wait and see how things develop.” said Dullien.
According to the IFO forecast, the labor market is proving to be robust. The number of unemployed will rise by around 130,000 to 2.55 million this year, but will then fall again to 2.45 million in 2024. At the same time, the number of people in work is likely to increase sharply and reach a record level of 46.07 million in the coming year. Government borrowing should go down. While it was 106 billion euros last year, a deficit of 69 billion euros is expected for 2023 and 27 billion euros for 2024.