Just as supply chain headwinds are starting to abate, soaring energy costs exert a new drag on income and output growth. Together with costlier borrowing, this is likely to weigh on investment. Further losses in purchasing power amid high inflation are expected to curtail private consumption, despite partial relief from policy support. GDP is forecast to grow by 1.6% in 2022 but decline by 0.6% in 2023 before recovering by 1.4% in 2024. The government deficit is expected to remain elevated as pandemic-related expenditure gives way to measures mitigating the impact of high energy prices.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||2,6||1,6||-0,6||1,4|
|Inflation (%, yoy)||3,2||8,8||7,5||2,9|
|General government balance (% of GDP)||-3,7||-2,3||-3,1||-2,6|
|Gross public debt (% of GDP)||68,6||67,4||66,3||65,4|
|Current account balance (% of GDP)||7,4||3,7||4,7||5,0|
Germany cleared the prepandemic level of output only in the third quarter of 2022, later than many other Member States. The economy grew throughout the first three quarters in 2022 driven by an ongoing recovery of private consumption, benefiting from the reopening of services and the use of pandemic-induced savings, although purchasing power was increasingly constrained by inflation. Exports were suffering from lingering trade disruptions aggravated by the Russian war of aggression against Ukraine. While production of equipment was still increasing, energy intensive intermediate industries were cutting output. Investment dynamics were wavering.
Heading for recession
In recent months, sentiment indicators have deteriorated markedly, reflecting the increase of energy costs. As these are set to remain elevated well into 2024, and policy support is assumed to relieve households only partially, private consumption is set to decrease this winter and take time to recover afterwards. Local energy-intensive products are being replaced with imports, which is expected to depress activity in coming quarters. While order backlogs are still high, order inflows are weakening. Supply bottlenecks have eased but remain a constraint on production.
The pressure on margins from sharp increases in producer prices, weakens the outlook for equipment investment. Higher building and borrowing costs are expected to weigh on construction. However, the gradual adjustment of supply chains and overall solid corporate finances should set the stage for a resumption of investment growth in the course of 2023. With supply bottlenecks easing, exporters would be then able to unwind production backlogs and benefit from recovering global demand.
Overall, real GDP is set to grow by 1.6% in 2022 and to decrease by 0.6% in 2023, before rebounding by 1.4% in 2024. A downside risk to the forecast is that delays to diversifying energy supplies and to reaching energy savings targets could cause shortages and rekindling energy price inflation in the winter of 2023-24.
Employment to stay stable
At 45.5 million in the second quarter of 2022, employment was 0.4% above the pre-pandemic level, while the unemployment rate remained stable at the historically low level of 3.0%. Whereas hiring expectations have deteriorated in recent months, reported labour shortages continue increasing and employment is expected to remain broadly stable.
Wage growth averaged 5% on an annual basis in the first half of 2022 and is set to continue at a similar rate in 2023 and 2024, supported by an increase in the minimum wage and a tight labour market. However, the recoup in real wages is expected to be partial and protracted as suggested by wage negotiation outcomes throughout 2022. The household saving rate is set to come down but stay just above its pre-pandemic level over the forecast horizon.
Trade disruptions, more expensive energy imports and the resumption of foreign travel have led to a significant decrease in the current account surplus in 2022. An expected improvement in terms of trade would result in a rebound over the forecast horizon to be moderated by a projected increase in the import content of production.
Inflation to stay elevated
In October 2022, HICP inflation reached 11.6% and is expected to come out at 8.8% for the year, driven by the surge in energy prices, rising input costs and a boost to service sector wages. The staggered pass-through of wholesale energy prices and a tight labour market are set to lead to a moderate decline in the inflation rate to 7.5% in 2023.
Energy measures keep deficit up
With the phasing out of COVID-19 related measures, the deficit is projected to further decline to 2.3% of GDP in 2022 after 3.7% of GDP in 2021. However, the underlying improving fiscal position is offset by various measures adopted this year to mitigate the economic and social impact of high energy prices (1.2% of GDP in 2022, 1.8% of GDP in 2023), preventing a larger deficit decline in 2022. These energy-related measures, and especially the “gas price break”, are expected to increase the deficit again to 3.1% in 2023 and 2.6% in 2024.
The energy-related relief packages include for 2022 a one-time lump sum bonus for energy costs and the advanced abolition of the surcharge for renewable energies, as well as a reduction in fuel prices and public transport costs. The main measures against rising energy prices in 2023 and 2024 comprise the introduction of a “gas price brake” for households and companies that is expected to use up around half of the announced EUR 200 bn fund (around 5% of GDP). Other measures include the reduction of the value added tax on gas and district heating from 19% to 7%, as well as adjustments to the income tax to counter the tax bracket creep.
After peaking at 68.6% in 2021, the government debt-to-GDP ratio is projected to decrease to 67% in 2022, 66% in 2023 and 65% in 2024. Despite continuing high deficits, the decline in the debt ratio is partly driven by the growth of nominal GDP on the back of high inflation, the reduction in the portfolio of bad banks and the decline of cash reserves.