Economy: Inflation pulls German economy down – economy

Continued sharply rising prices are burdening the German Economy. Economic experts warn of this in one new economic forecast. Although gas and electricity are no longer as expensive as they were a few months ago, inflation as a whole has not risen recently. But if you factor out the energy costs, the so-called core inflation continues to rise. Companies are therefore increasing prices across the board, and Germans have to spend more on many products and services. The rise in core inflation has recently accelerated further, warns economist Ulrike Malmendier from the German Council of Economic Experts, as the economists are officially called.

According to the influential economists, the German economy will de facto stagnate this year, and gross domestic product could grow by 0.2 percent. A year ago, when the economic consequences of the Russian invasion of Ukraine were not as foreseeable as they are today, economists had forecast growth of 3.6 percent for 2023. That would have corresponded to a decent recovery after the Corona crisis. This recovery is now canceled for the time being.

Due to rising prices, people can afford less. The experts write that this is “the central stress factor for economic development in Germany”. For example, Germans spent noticeably less money on restaurants and hotels, with sales in the hospitality industry falling by 16.4 percent between October and December 2022. Because of inflation, many people keep their money together – it’s bad for the gross domestic product. On the other hand, it is good for growth that unemployment is still very low and the state is supporting the economy.

The situation is completely different than in the financial crisis

The bank turbulence of the past few days has not yet been directly incorporated into the new forecast. However, the economists do not consider the stability of the financial markets to be at risk. The situation is very different from the 2008 financial crisis, says economist Malmendier, referring to the USA and Switzerland. The transactions between the banks are not disturbed, companies continue to receive loans from the institutes. According to Malmendier, this suggests that the central banks should continue their fight against inflation and raise interest rates further. However, it is also important to consider the psychology of the financial markets. According to her judgment, this has worked well so far, she praised the rapid response of central banks around the world.

It should also be noted that there was no crash in the winter that just ended. Some had feared that, especially in view of the enormous increase in gas prices. In the meantime, however, energy prices have fallen significantly again. This is not only good for citizens and companies. The energy crisis is thus also for the state much cheaper than expected.

The price brakes for gas and electricity financed from tax money will cost much less in 2023 than was assumed a few months ago. According to the experts’ forecast, the expenditure for the gas price brake will only amount to 15 billion euros this year, while the electricity price brake will be 13 billion euros. The federal government had put aside a multiple of that: a total of 200 billion euros, Chancellor Olaf Scholz (SPD) had spoken of a “double boom”.

However, the German economy is unlikely to really recover until 2024. Economic growth could then be 1.3 percent, experts predict. In the coming year, wages could rise again and inflation fall – people should then be able to buy more, which will support the economy. However, economic output in 2024 will again be burdened by the monetary policy of the central banks. Because of the rising interest rates, companies are likely to invest less, write the economists. The forecast increase of 1.3 percent is therefore rather meager.