IfW with a bitter prognosis
“Ukraine shock” halves German growth
03/17/2022 12:06 p.m
The pandemic is followed by war: Two German economic institutes cash in on their economic forecasts after the Russian invasion of Ukraine. According to the Institute for the World Economy, Germany will lose around 90 billion euros this year and next.
The Institute for the World Economy (IfW) has halved its growth forecast for Germany because of the war in Ukraine. The gross domestic product is expected to grow by only 2.1 percent this year, according to one new prediction. In December, the IfW had assumed 4.0 percent.
“The German economy is once again facing severe headwinds,” emphasize the researchers, who at the same time slightly raised their forecast for 2023 from 3.3 to 3.5 percent. Overall, economic output in both years was around 90 billion euros lower than previously assumed, “which is mainly due to the Ukraine shock”.
“War weighs heavily on recovery”
Also the one based in Essen RWI Institute lowers its growth forecast. For this year, it only expects growth of 2.5 instead of 3.9 percent. At the same time, it raised its forecast for 2023 from 2.5 to 3.6 percent.
“The war in Ukraine is a heavy burden on the recovery of the German economy from the Corona crisis,” said RWI economic chief Torsten Schmidt. “In the coming months, however, the upward forces are likely to prevail again.”
The Russian invasion of Ukraine exacerbates the already existing problems for the highly networked German industry. Around 60 percent of companies report additional disruptions in the supply chain and logistics as a result of the war, according to a survey by the Association of German Chambers of Industry and Commerce (DIHK). “In the meantime, we have received feedback on many channels about a sharp increase in the problems,” said DIHK foreign trade chief Volker Treier. In the nationwide IHK business survey at the beginning of the year, 84 percent reported moderate to significant delivery problems.
High costs, delivery bottlenecks and low sales opportunities
“The war in Ukraine is leading to high raw material prices, new supply bottlenecks and dwindling sales opportunities,” emphasize the IfW’s economists. “The high commodity prices reduce the purchasing power of disposable income and thus dampen private consumption.”
Additional delivery bottlenecks are also having a noticeable impact on the industry. The sanctions and the increased uncertainty caused by the war are also likely to reduce sales opportunities, at least temporarily.
“All of this is affecting the economy in a phase in which the dampening effects of the pandemic are abating and a strong recovery was planned,” said the IfW. The purchasing power in private households, which had been pent up during the pandemic, and the thick order cushion in industry would also cushion the shock waves from the Ukraine war.
Inflation expected at 5.8 percent
The IfW experts are not giving the all-clear on prices. “The inflation rate is likely to be 5.8 percent this year, the highest it has ever been in reunified Germany,” it said. Even if raw material prices stop rising and supply bottlenecks gradually ease, the inflation rate is likely to remain high at 3.4 percent in the coming year.
The war is unlikely to leave much of a mark on the labor market, say the economists. However, as public spending increases, budget deficits will remain at high levels.
DIHK Vice President Ralf Stoffels is calling on the federal government to continue to use the instruments that have been tried and tested in the corona pandemic – from short-time work benefits for companies that are badly affected to hardship grants and KfW loan programs.