Joint Economic Forecast Spring 2023

Stubborn Core Inflation – Time for Supply Side Policies

April 5, 2023


The leading economic research institutes have raised their forecast for growth in German economic output in the current year to 0.3%. In the fall, they were still expecting a decline of 0.4%. The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared in the fall. The main reason for this is a smaller loss of purchasing power as a result of a significant drop in energy prices. Nevertheless, the rate of inflation will fall only slowly from 6.9% last year to 6.0% this year.

Government relief measures and foreseeably high wage increases in Germany are strengthening domestic demand and keeping domestic inflation high. Only next year will this aspect of inflationary pressure also ease, bringing the inflation rate down noticeably to 2.4%. Gross domestic product is then expected to grow more strongly again by 1.5%.

There is good news for the labour market: The number of people in employment is likely to increase again, from 45.6 million in 2022 to 45.9 million in 2023 and 46.0 million in 2024. This year, the number of unemployed will rise temporarily from 2.42 million to 2.48 million as it will take Ukrainian refugees a little time to enter the labour market. In the coming year, however, unemployment is expected to fall again to 2.41 million people.

The government will reduce its deficit only slightly to 2.2% of nominal GDP in the current year, since fiscal policy will remain expansionary for the time being. Only next year will policy be tightened more significantly, bringing the deficit down to 0.9%. A large share of the previous year’s terms-of-trade losses, which measure the loss of purchasing power in the overall economy due to the sharp rise in the price of energy imports, will be recovered by the end of 2024. As a result, the current account balance will rise again to 6.0% of economic output, after temporarily falling to 3.8% last year.

The Joint Economic Forecast is prepared by ifo Munich, IfW Kiel, IWH and RWI Essen.

East German Economy has Come Through Energy Crisis Well so far

In 2022, the East German economy expanded by 3.0%, significantly stronger than the economy in West Germany (1.5%). The background is a more robust development of labour and retirement incomes. For 2023, the IWH forecasts a higher GDP growth rate of 1% in East Germany than in Germany as a whole (0.3%). The unemployment rate is expected to stagnate, with 6.8% in 2023 and 6.7% in the following year.

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