Winter is coming
The German economy is being hit hard – from skyrocketing energy prices and potential winter gas shortages to an insufficient supply of skilled labor and slowing global economic growth. Given the rapid deterioration of conditions over the past several months, the short-term outlook for the German economy is looking gloomy.
Beginning in the late 1990s, Germany benefited from competitive labor costs (with productivity rising faster than labor costs) and rode the wave of globalization over the past couple of decades to become an exporting powerhouse. Those halcyon days are now over.
The post-pandemic global economy is undergoing what is likely to be a prolonged deglobalization phase with cross-border trade and investment shrinking. More than most other countries, Germany benefited from the open global trading system and now faces stiff headwinds as globalization trends are reversed.
But Germany’s challenges go well beyond the reversal of globalization. Russia’s attack on Ukraine has caused great uncertainty, bringing turmoil to European and world energy markets. High inflation, driven by rapidly rising energy costs, is hitting German consumers and businesses hard.
German manufacturers have been relying on cheap imported Russian gas as one element of their global competitiveness. That competitive advantage is now gone. German energy costs are currently higher than in many other European countries, the US and China.
And finally, skilled-labor shortages, made worse by deteriorating demographic trends, are further hampering German competitiveness. The size of the German labor force is projected to peak in a few years and then begin shrinking, making the challenges of an aging society more acute.
Several of Germany’s leading economic institutes recently revised their economic forecasts downward. Most economists assume the German economy is already in a recession, or soon will be.
On the more optimistic end, the Kiel Institute for the World Economy lowered its expectations for German economic growth in 2023 to 0.7%, a sizable downgrade from its June forecast of 3.3%. The RWI – Leibniz Institute for Economic Research in Essen also revised its 2023 growth estimates downward from 2.7% to 0.8%, citing the strain of high inflation and great uncertainty surrounding the war in Ukraine. Torsten Schmidt, RWI’s head of economic research, explained, “The biggest risk for the German economy is the availability of gas during the coming winter.”
On the more pessimistic end, several institutes are predicting negative growth next year. The Halle Institute for Economic Research downgraded its forecast for German growth, predicting the economy will shrink by 1.4% in 2023. Oliver Holtemöller, Vice President and Head of the Department of Macroeconomics, stated that because of rapidly increasing energy costs, “manufacturing companies are losing their international competitiveness.”
The ifo Institute also significantly lowered its forecasts for 2023, predicting a contraction of 0.3% for the year. Timo Wollmershäuser, Head of Economic Forecasting at ifo, noted, “We are heading into a winter recession.”
(N.B. The four economic institutes above published a combined fall forecast on behalf of the German federal government today, revising GDP down to 0.4% for 2023 with an inflation rate of 8.8%.)
And finally, Bert Rürup, Chief Economist at Handelsblatt and President of the Handelsblatt Research Institute, predicted at least three quarters of recession starting in Q3, 2022 and an overall decline of 0.4% in German economic output in 2023.
Mr. Rürup points to energy shortages and inflation as the main reasons for his somber outlook, with “uncertainty surrounding the continuing course of the war in Ukraine hovering over everything.” Adding to the economic difficulties, he noted, Germany’s most important trading partners – the eurozone, the US and China – will also be experiencing economic difficulties this winter. And high inflation will eat into consumers’ purchasing power. He expects inflation to top out at 12% around the end of this year. “This crisis is going to make the vast majority of Germans poorer,” Mr. Rürup noted.
Germany, of course, is not alone in experiencing a deterioration of economic conditions over the past several months. But due to a unique combination of factors, German business leaders and politicians will face several critical challenges in the coming months and years.
[Text in blue above has been translated from German by Randal Gernaat.]
