Outlook 2023/24: New global realities

Germany’s growth is under pressure from renewed cyclical and structural headwinds. In this edition of Focus Germany we introduce our new Nowcast Model for German GDP, predicting that the German economy should have expanded in Q2, but that risks for activity in H2 are increasing. We take the summer break in Berlin as an opportunity for a midterm review of the traffic-light coalition’s work. In a historic flashback we revisit the challenges Germany was facing when the Economist called it the sick man of the euro and which policy measures transformed the country into an Economic superstar a decade later. We find interesting parallels to today’s situation. [more]

In the second edition of our Energy Transition Monitor we disentangle the drivers of lower economy-wide energy consumption into cyclical (winter-recession) and structural (loss of production capacities, energy-efficiency measures) factors. Moreover, we take a look at the shift in primary energy sources – from gas towards renewables and coal and why we are (finally) seeing a higher speed of solar PV build-out. We also provide an update of our gas supply-demand model for the upcoming winter. Finally, we summarize current policy action aimed at boosting domestic energy capacity (solar and wind) and improve the overall economy’s energy efficiency, both at the EU and national level. Our earlier thematic analysis on German gas supply and Germany's energy transition includes: "Energy Transition Monitor #1 - what, when and how", "Costs of electricity generation: system costs matter" and "EU Green Deal Industrial Plan - status update and how to fund it". [more]

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]

In the first edition of our Energy Transition Monitor, we take stock of the current speed of renewables rollout, e-car uptake, heat-pump installations, and energy infrastructure build-up (e.g., regarding hydrogen) in Germany. We then analyse existing bottlenecks for reaching envisaged targets for 2030. Finally, we provide an update of current policy action aimed at mitigating those bottlenecks, both at the EU and national level, and potential implications of these policy measures on investment spending (private and public). [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]

Digital policy has become increasingly important in recent years. With its digital strategy, the German government has presented an agenda for which a digital budget is to be adopted in the Bundestag in November 2022. This is an important contribution by Germany to the EU's Digital Decade, particularly in the four areas of connectivity (5G and fiber coverage), digital skills, the use of digital technologies and AI in companies, and the provision of digital public services. Further legislative initiatives at EU level have as their goal the creation of a digital space in order to be able to compete internationally with Asia and the USA. To this end, the German government's digital strategy sets priorities in 25 fields of action. The next three years will be decisive for an effective implementation of the digital reform program for Germany. [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]

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]

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]