In view of the energy crisis, Germany fears a winter recession

Growth alert: Germany is preparing to enter a recession this winter due to the severe impact of the current energy crisis on households and businesses, according to forecasts by the IFO Institute and the central bank. “Russia’s summer gas supply cuts and the resulting sharp price increases are wreaking havoc on the economy,” the research institute said in a statement Monday. The organisation, one of the most influential in Europe’s largest economy, has slashed its June growth forecast by 4 points and is now forecasting a 0.3% drop in GDP in 2023.

It is the first German institute to forecast a decline in gross domestic product for the eurozone’s largest economy next year. The IFO expects a technical recession in the first quarter of 2023, with GDP falling by 0.4%, after a 0.2% contraction in the fourth quarter of 2022. The day before, the President of the influential Deutsche Bundesbank, Joachim Nagel, had a similar one forecast and considered an entry into recession at the end of this year and beginning of 2023 to be “possible”. “There are a certain number of elements” that lean towards that scenario, he told Public Radio.

According to the IFO, the situation could only “normalize” with growth of 1.8% in 2024. According to the IFO, average inflation is set to rise to 9.3% next year, after 8.1% in 2022. The Bundesbank forecasts inflation to rise to “more than 10%” over a year and to “more than 6%” in December %” in 2023.

Also read: Berlin unblocks massive aid plan against rising prices

The Russian gas problem

“We’re slipping into a winter recession,” sums up Timo Wollmershäuser, head of the economics course at this institute. Gazprom drastically reduced its gas supplies to Germany via Nord Stream in recent months before halting them altogether in early September amid a showdown between Moscow and the European Union over the war in Ukraine.

Germany, which got 55% of its supplies from Russia before the war, has to source elsewhere at much higher prices. Those tensions have skyrocketed gas and electricity prices in the country, which were already high due to the 2021 post-pandemic recovery. And this movement is expected to continue. “Energy suppliers will adjust their electricity and gas prices (…) significantly, especially at the beginning of 2023,” estimates the IFO.

Result: Inflation will continue to rise, to around 11% in the first quarter of 2023, which will severely affect household purchasing power, the institute continues to forecast. At the beginning of September, the federal government therefore adopted a third plan of measures to help those in need. However, the IFO estimates that this will not be able to compensate for the expected loss of purchasing power.

“The drop in real wages of around 3% this year and next will be the highest since the introduction of the national accounts in 1970,” predicts Herr Wollmershäuser. According to the price comparator Check24, a “typical household” with a consumption of 20,000 kWh paid 3,717 euros per year for its gas in August, i.e. an “average price of 18.6 cents per kWh” or an “increase of 185%” over one year .

Also read: A hashtag to show the faces of poverty in Germany

wave of bankruptcies?

Companies that are less protected than households are also sounding the alarm and demanding new help. The government is preparing a new package of measures, which, however, is “not comparable to those (granted) during the pandemic,” said Finance Minister Christian Lindner recently.

To deal with the health crisis, Berlin had lavishly spent and put the debt brake on hold, a constitutional principle that forbids borrowing more than 0.35% of GDP a year. But Berlin insists that it wants to respect this rule from 2023, despite the colossal hardship of the economy in the face of the energy crisis. “I don’t believe in that (a wave of bankruptcies),” even if “certain sectors could be forced to temporarily stop production,” said Economics Minister Robert Habeck.

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