Economy under pressure: As early as March, production in Germany is likely to be noticeably dampened, predicts IfW Vice Stefan Kooths
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Due to the war in Ukraine and the significant rise in energy prices, the German economy will also shrink in the current quarter. Three major economic research institutes agree on that. In the medium term, however, there is much to be said for better times.
FLeading economic research institutes see Germany on the direct path back into recession. “With the outbreak of war between Russia and Ukraine, a decline in gross domestic product and thus a technical recession has become very likely,” said Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW), to WELT. Production is likely to be noticeably dampened as early as March, and the significant rise in energy prices is also slowing consumption.
Torsten Schmidt, head of economic activity at the RWI Leibniz Institute for Economic Research in Essen, puts the probability at 90 percent that the economy will also shrink in the first quarter of 2022 after the minus in the fourth quarter of 2021. Oliver Holtemöller, head of the Macroeconomics department at the Leibniz Institute for Economic Research in Halle, also speaks of a “worsened outlook”.
Both announced that they will lower the annual forecasts for 2022. In December, the economic researchers at RWI in Essen and the Leibniz Institute in Halle had still assumed an increase in gross domestic product of 3.9 percent and 3.5 percent for the year as a whole. The changed forecasts are to be published on March 17th.
A technical recession occurs when a country’s economic power declines for at least two quarters in a row. This was last the case at the beginning of 2020, when the economy collapsed by almost ten percent at its peak due to the corona pandemic.
Pent-up purchasing power in the billions
According to the economic researchers, Germany is a long way from such a strong decline as two years ago. The job market has recently recovered too well for that, said Schmidt. “That doesn’t fit in with a recession.” He is only assuming a temporary weakness. “We expect a negative first quarter but still expect a strong recovery from the second quarter,” he said.
From Kooths’ point of view, the fact that the “post-pandemic buoyant forces are still very strong” speaks against a severe economic slump. The economist points to a pent-up purchasing power of 215 billion euros in private households over the past two years and a record backlog of orders in industry. He therefore considers the finding of a technical recession, which now seems inevitable, to be only of limited significance.
The biggest negative shock that the German economy is currently having to cope with is the sharp rise in energy prices. Both companies and consumers are suffering as a result. “We estimate the direct purchasing power absorption in private households due to higher energy prices at around 35 billion euros for the current year,” said Kooths. In his opinion, however, the risk of recession as a result of a possible lack of gas deliveries will only become virulent in the coming winter.
Holtemöller also named the effects on international trade associated with the Russia-Ukraine war and the associated turbulence on the financial markets as risks. The consequences of the war can also have stabilizing effects on the domestic economy. Holtemöller referred to the refugee migration: “The expenses associated with this could have a mathematically positive effect on government consumption.”
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