Joint Economic Forecast Spring 2022

From Pandemic to Energy Crisis: Economy and Politics under Permanent Stress

Kiel, April 13, 2022

 

The German economy is steering through difficult waters and faces the highest inflation rates in decades. In their spring report, the leading German economic research institutes revise their outlook for this year significantly downward. The recovery from the COVID-19 crisis is slowing down as a result of the war in Ukraine, but remains on track. The institutes expect GDP to increase by 2.7% and 3.1% in 2022 and 2023 respectively. In the event of an immediate interruption to Russian gas supplies, a total of 220 billion euros in German economic output would be at risk in both years.

The recovery process in the German economy is once again being delayed. The economic picture is shaped by opposing forces, all of which are driving up prices.

Fading pandemic restrictions are supporting the service sectors while continuing supply chain bottlenecks in the wake of the COVID-19 crisis are still disturbing manufacturing output. The shockwaves from the war in Ukraine are weighing on economic activity on both the supply side and the demand side. Government stimulus packages during the pandemic already had an inflationary effect. Increasing prices of critical energy commodities following the Russian invasion further fuel the upward pressure on prices.

Due to the high level of uncertainty about energy supplies from Russia, which are important for Germany’s economic performance, the institutes have calculated two scenarios in their spring report. One assumes ongoing gas deliveries and no further economic escalation from the war in Ukraine (baseline scenario), one assumes a sudden supply stop of Russian energy (adverse scenario).

In the baseline scenario, Germany's gross domestic product (GDP) increases by 2.7% in 2022, and in the event of an energy supply stop by only 1.9%. In their fall report, the institutes’ forecast was 4.8%. The main reasons for the revision are the war in Ukraine and the worse than expected course of the pandemic in the past winter half-year. In 2023, GDP is forecast to increase by 3.1%, and to contract by 2.2% in the event of a supply stop (Autumn report +1.9%). The cumulative loss of GDP in 2022 and 2023 in the event of a supply freeze is likely to be around 220 billion euros, equivalent to more than 6.5% of annual economic output.

Implications for the East German Economy

The recovery of the East German economy, like that of Germany as a whole, will weaken considerably due to Russia’s war in Ukraine. However, the economic slump and recovery were not as pronounced as in West Germany. In 2021, East German output grew by 2.3%, less than in Germany as a whole (2.9%). According to the Halle Institute for Economic Research (IWH), GDP growth in East Germany is also likely to be lower than in Germany as a whole in 2022 (2.1% in East Germany vs. 2.7% in Germany) and 2023 (2.5% vs. 3.1%).

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