Sebastian Becker

With Q1 GDP growth revised to -0.3% we now expect annual GDP to shrink by 0.3% in 2023. With the expected US recession weighing on German economic momentum towards year end we have cut our annual forecast for GDP growth in 2024 to 0.5% from 1.0%. Meanwhile, the energy transition policy is putting strains on government cohesion, as can be seen from the failure to agree on a piece of climate legislation this week. Spending pressures and debt-brake limits add to tensions. Still, none of the three ruling parties has an incentive to trigger early elections. [more]

The German economy – one year after. With surprisingly strong hard data for January, chances are rising that GDP might be saved from another decline in Q1. Although not yet our baseline call, this would prevent Germany from going through a technical recession. However, still heightened uncertainty and real income losses due to high inflation will likely keep investment spending and private consumption flatlining in the first half of the year. Hence, we maintain our 0% forecast for 2023 German GDP growth, although upside risks have increased since the start of the year. [more]

We look at the expected recession in the winter half-year 2022/23 and the onset of recovery, how inflation will peak, while the labor market loses momentum and private consumption is hit by the loss of purchasing power. Construction and Capex spending are set to deteriorate. Fiscal policy continues to lean against the headwinds but should normalize somewhat. Loan growth, both with corporates and private households, may slow substantially. In a medium-term perspective, we discuss risks for the manufacturing industry and Germany’s geopolitical and competitive position. [more]

GDP: Lower risk of gas shortages but real income shock will bite. Fully replenished gas storages and the larger than expected fiscal support for households suggest that the recession will not be as deep as expected a few weeks ago, although private households will have to cope with a real income shock. [more]

German economy: Out in the cold. The real income and confidence shock resulting from the NS1 shutoff as well as the negative real wealth shock of some EUR 1.5 tn will likely send private consumption into a tailspin in 2023. Surging uncertainty and the energy shock causing a slump in competitiveness and profits will put a brake on corporate investment spending, in our opinion. The three fiscal packages and a probable additional one will likely not prevent a GDP slump. Together with a weaker global outlook, we expect the loss in final domestic demand to result in a GDP drop of 3% to 4% in 2023, after an increase of around 1% in 2022. [more]

Moving into recession. A likely further decline in Russian gas supply after the maintenance of NS1 will necessitate additional savings. While we do not expect a full rationing, we believe the economic consequences will together with a US recession and other headwinds push Germany into a recession in H2 2022. Given that prospects for Russian gas deliveries have darkened since February, this energy shock will not hit Germany by surprise or unprepared. Hence, we expect a modest but rather drawn-out GDP decline, as the economy gradually adjusts. After a 1 ¼% expansion in 2022, German GDP will shrink by around 1% in 2023, largely because consumers will not be able to offset the real income loss by further dissaving. In a “tap remains turned off” scenario, we expect a rationing of gas leading to a GDP slump between 5% and 6% in 2023. [more]

In this edition of Focus Germany we look at the cyclical, short-term challenges brought about by the Ukraine war with regard to growth, inflation and public finances. We also analyse the more structural longer-term challenges, such as reducing the countries’ energy dependence on Russia and the governing coalition’s efforts to integrate new priorities precipitated by the historic watershed into its already very ambitious agenda. [more]

War in Ukraine – slowing but not ending the German recovery. In a moderate economic scenario (which is our new baseline forecast) we expect German GDP to grow by between 2 ½% and 3% (old forecast 4%). Surging energy prices should push the annual inflation rate to around 5 ½% in 2022. Government spending is expected to be ramped up by 1 ¼ and 1 ½ pp, limiting the overall growth loss. In a more severe scenario headline inflation could rise to between 6 ½% and 7%, as oil and gas deliveries are at least temporarily halted. Annual GDP growth should be a meagre 1% to 1 ½%. [more]

Due to significant demand/supply imbalances as well as climate policy measures, energy prices were the main driver of consumer price inflation in Germany in 2021. In 2022 as a whole, prices might increase by more than 20% for gas on average and by more than 15% for electricity. In that case, higher gas and electricity prices would substantially boost Germany’s inflation rate in 2022 (by up to 1 percentage point). In the medium term, a more ambitious climate and energy policy will very likely continue to raise consumer price inflation. At least over the transition period, rising CO2 prices (via the national carbon levy or the EU-wide emissions trading system) will not only lead to a permanently higher price trend for fossil fuels (oil/gas heating, fuels) but also costs for electricity generation. Overall, this weakens the widespread argument to view energy price increases as temporary. [more]

4% GDP growth in 2022, despite technical recession in winter half. A synchronous acceleration should result in annual GDP growth of 4%. In 2023, quarterly GDP growth will slow towards trend. In fiscal policy ambitious spending plans and debt brake commitment lead to open funding questions. Based on the previous fiscal regime, the fiscal deficit is set to narrow considerably. Still, the new government’s big spending plans, which are not yet quantifiable, could drive deficits considerably higher. Inflation decelerating from 5%+ rates, but higher core rate more permanent. Carryover effects and cost pressures will keep CPI inflation elevated. In 2023, headline and core rates are unlikely to fall below 2%. German politics 2022: “Team Scholz” will focus on climate protection and sizeable corporate tax allowances for green and digital investments. German EU policy might be less fiscal orthodox and open to a cautious reform of the EU’s fiscal rules. [more]

The recent flood caused by heavy rain was among the most severe natural disasters hitting Germany since reunification. More than 170 people lost their lives and many private homes and public buildings, roads and municipal infrastructure were destroyed. Since the flooding occurred in regions with low industrial density, the expected negative impact on overall economic activity, in particular on industrial production, should be relatively limited. Still, the regional impact on agricultural production (such as wine-growing) might be significant. Some of the most recent polls already fully capture post-flood views. As expected, there is no big shift in voter preferences. The events will likely confirm voters' previous choices. [more]

Since the start of the COVID-19 pandemic the US has launched fiscal packages worth USD 5.3 trillion (25.5% of GDP). With new fiscal plans in the pipeline the total stimulus could even exceed USD 9 trillion (or 40% of 2020 GDP). Although the success of this bold US experiment is far from certain, it has started a new trend in fiscal policies. As low interest rates have depressed governments’ interest bills – despite surging debt – many observers advocate to make greater use of deficit spending for funding a public investment campaign over the next decade. Given weak growth prospects, restoring debt sustainability seems a Herculean task for high debt countries. But even some “fiscally prudent” countries like Germany face severe fiscal challenges due to rapid population ageing. [more]