IWH Economic Outlook 2023

No Deep Recession Despite Energy Crisis and Rise in Interest Rates

Halle, December 20, 2022

 

High energy prices and deteriorating financial conditions are weighing on the German economy. However, the period of weakness over the winter is likely to be moderate, partly because the energy price brakes are supporting private incomes. The IWH forecasts that due to the recovery from the pandemic in the first three quarters, gross domestic product (GDP) is estimated to have increased by 1.8% in 2022. Due to high energy prices, however, GDP will slightly decline in the winter months and stagnate on average in 2023. Inflation will fall from 7.8% in 2022 to 6.5% in 2023.

The outlook for the international economy in 2023 is shadowed: It is uncertain whether Europe will have sufficient energy supplies this winter and next, but it is certain that key interest rates will continue to rise in 2023. In addition, the pandemic outbreak in China will lead to production losses. However, the tension in supply chains and international price dynamics appear to be easing somewhat.

At the turn of the year, the German economy is facing difficult times. However, the German economy has so far proved quite robust, and production expanded into the fall as it recovered from the pandemic. Real incomes will fall significantly in the winter, when energy price rises reach their maximum, but the subsidisation of energy through the gas and electricity price brakes will dampen the decline in real incomes and private consumption. Beginning in spring, a further easing of international supply chains and a revival of the global economy should support the economy. Some stimulus will come from the high pressure on the German economy to modernise.

According to the IWH medium-term projection of the German economy, growth in the next six years will be about the same as in the past six years, at 1% per year. The national budget will remain in deficit, but the debt level will decline again relative to the gross domestic product (GDP) from 2024 onwards. At this rate of economic expansion, greenhouse gas emissions will continue to decline in the medium term, but at a much slower rate than necessary to meet the national emission reduction targets.

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