Joint Economic Forecast Autumn 2023

Purchasing Power Returns – Political Uncertainty High

September 28, 2023


According to the Joint Economic Forecast, Germany's gross domestic product declines by 0.6% in 2023. This is a strong downward revision of 0.9 percentage points from the forecast made in spring 2023. "The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected in spring," says Oliver Holtemöller, Vice President and Head of the Macroeconomics Department at the Halle Institute for Economic Research (IWH).

Germany has been in a downturn for more than a year. The sharp rise in energy prices in 2022 put an abrupt end to the recovery from the pandemic. Consumer price inflation, which was already on the rise, has risen to over 8%. This is taking purchasing power away from private households. Key interest rates have risen by over four percentage points, hitting the construction industry in particular.

Business sentiment has recently deteriorated again, not least because of heightened political uncertainty. Overall, the indicators suggest that production fell again noticeably in the third quarter of 2023. However, wage increases have meanwhile followed the price hike, energy prices have fallen, and exporters have partially passed on their higher costs, so that purchasing power is returning. Therefore, the downturn is expected to subside by the end of the year, and the degree of capacity utilisation will rise again going forward.

The institutes’ forecast of 1.3% for 2024 is only 0.2 percentage points below their spring forecast. In the following years, a decreasing potential growth rate due to the shrinking labour force will become more and more apparent.

The downturn has meanwhile reached the labour market. However, the institutes expect only a moderate increase in unemployment to 2.6 million people in 2023. In the coming year, the number of unemployed will probably decrease somewhat.

On the price front, the situation is gradually easing. The inflation rate is expected to be 6.1% in 2023 and to decline to 2.6% in 2024. The institutes see core inflation (inflation excluding energy prices) at 6.1% in the current year and 3.1% in 2024.

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

The Downturn in 2023 is Milder in East Germany than in Germany as a whole

The German economy has been in a downturn for more than a year. In East Germany, however, the economy has been somewhat stronger in the past four quarters: According to the Halle Institute for Economic Research (IWH), East German gross domestic product (GDP) is expected to increase by 0.5% in 2023, while production in Germany as a whole will fall by 0.6%. Next year, expansion rates of 1.3% are forecast in both the east and the west. For 2025, East German gross domestic product is expected to grow by 1.2%, which is slightly slower than in Germany as a whole (1.5%).

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