Germany will enter recession next year, say leading economists

A new forecast by Germany’s leading economic institutes predicts the eurozone’s largest economy will slip into recession next year, triggered largely by a “drastic” increase in energy costs caused by Russia’s war in Ukraine.

The institutes said the country’s gross domestic product would expand by 1.4 per cent this year, contract by 0.4 per cent in 2023 and grow by 1.9 per cent in 2024.

They said inflation would rise to 8.8 per cent next year, slightly higher than this year’s level of 8.4 per cent, though it would decline to 2.2 per cent in 2024.

The economists blamed the worsening outlook on the cut in Russian gas exports to Europe, which pushed the price of the fuel to record levels over the summer and raised the prospect of gas shortages this winter.

Though they do not expect Germany to run out of gas, the institutes said the supply situation “remains extremely tight”, with gas prices likely to remain “well above pre-crisis levels”. “This will mean a permanent loss of prosperity for Germany,” they added.

The forecast was produced by the Ifo Institute in Munich, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the Leibniz Institute for Economic Research.

It marks a radical revision of the institutes’ spring forecast, underscoring the darkening outlook for the economy and particularly for energy-intensive industries such as chemicals. Just five months ago, the institutes were predicting growth of 2.7 per cent this year and 3.1 per cent in 2023.

“This revision mainly reflects the extent of the energy crisis,” they said in a joint statement, adding that economic output in 2022 and 2023 would be €160bn lower than expected in the spring.

One sign of optimism was provided by the German labour market, which was, they said, having a “stabilising effect”. A shortage of skilled workers meant companies were keen to retain existing staff, “so employment is only likely to fall slightly temporarily”.

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