Macroeconomics

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]

It is, once again, the season of the year when not only are we preparing for Christmas holidays and starting to think about new year resolutions, but economic forecasters are also offering their outlooks for the upcoming year. However, the last two years should have convinced even the most stubborn hedgehog that there is far less predictability, let alone certainty, around us than we like to believe. In particular, problems resulting from “system complexity” are, in our view, not sufficiently appreciated by forecasters and the recipients of these forecasts, alike. The critical assumptions, nota bene assumptions not predictions, driving – to a large extent – GDP and inflation forecasts for the next one or two years, are the future development of the COVID-19 pandemic and the – hoped for – gradual easing of supply bottlenecks, both almost textbook examples of system complexity. So are, probably, the Philips curve models used to forecast inflation. Let’s face it, believing in inflation forecasts with exact numbers, even behind the decimal point, for several years out, is little different to believing in Santa Claus. [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]

In the face of rapidly rising COVID-19 infection rates causing regional bottlenecks in intensive care units, the current caretaker federal government and heads of federal states agreed on further restrictions yesterday. From now on, the hospitalisation ratio in federal states will be the new single most important indicator to watch. It measures how many COVID-19 patients per 100,000 people have been hospitalised during the last 7 days. As soon as certain thresholds are exceeded, new restrictions will come into effect. In this Germany Blog, we explain the new thresholds and measures in detail and provide an economic assessment to illustrate the impact. [more]

Another "COVID winter". GDP growth failed to accelerate further in Q3, as the supply shortages provided an increasing drag on industrial output. The supply chain issues will prevail throughout the winter half and only taper off very gradually during 2022. While private consumption was the growth engine in summer, the recent strong increase in the number of new COVID-19 infections will slow consumer spending during winter. Absent Q3 details we now expect GDP to stagnate in the winter half, but acknowledge the increasing risks of negative quarters. Given the upward revisions to H1 (published with the Q3 GDP flash) this would still result in an average growth rate of 2.5% yoy for 2021. Further upside surprises at all stages of inflation have, despite an increasing tightness in the labour market, not (yet) started a price-wage spiral. Also in this issue: The next German government is in the making. [more]

During the coming years, Germany’s potential growth rate will come under increasing pressure from demographic developments, it looks set to slow to just below ¾%. Shrinking potential growth will dampen cyclical resilience and tend to reduce debt sustainability. The new government should focus even more on potential growth. After all, it would be the great binding theme between the efficient and at the same time climate-friendly economy, demographics and the megatrend of digitalization. In the short term, rising energy expenses and the regulatory shortening of the useful life of machinery and equipment have a similar effect to a negative supply shock. If efforts to seize the opportunity for new investment and the installation of adequate replacements fail, the production-relevant capital stock would shrink, thus reducing potential growth. [more]

Never since reunification have industrial companies in Germany complained as much about material bottlenecks as they do at present. In addition to physical shortages of intermediate products, rising prices are also currently problematic for companies. This is reflected in producer prices. In August 2021, they were around 12% higher than a year earlier – the biggest increase since December 1974. The latest development is not a German phenomenon. In many countries around the world, the current economic recovery is being dampened by supply bottlenecks and higher prices. Supply bottlenecks and rising prices for intermediate goods are hampering the economic recovery in the manufacturing sector. Here, new orders in August 2021 exceeded the production level by close to 22%. Overall, we expect supply chain disruptions to keep us busy into 2022, although the low point in the supply crisis may be behind us. [more]

The consequences of the COVID-19 pandemic, ambitious climate policies, persistently negative interest rates, and large-scale security purchases by the ECB are increasingly raising the issue of a fair distribution. Policymakers tend to focus on the symptoms in order to appease their voters – and in doing so, they often neglect the root causes. [more]

Net migration towards Germany was much lower in 2020 than pre-COVID. The migration flows from outside of the EU were particularly hampered whereas migration within the EU fell by 'only' 5% compared to 2019. As a consequence, the new demand for housing was much lower than in previous years which helped to reduce the housing shortage. By contrast, the lack of qualified and non-qualified workers in the labour market has become more severe through the pandemic. [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]