Germany on the brink of a “winter recession”

published on Monday, September 12, 2022 at 12:22 p.m.

Growth alert: Germany is preparing to enter a recession this winter, due to the heavy impact on households and businesses from the current energy crisis, according to forecasts from the IFO institute and the central bank.

“Russia’s gas supply cuts over the summer and the drastic price hikes they triggered are wreaking havoc on the economy,” the research institute said in a statement on Monday.

The organization, one of the most influential in the largest European economy, has thus lowered its growth forecast dating from June by 4 points, and now forecasts a decline of 0.3% of GDP in 2023.

It is the first German institute to predict a drop in GDP next year for the eurozone’s largest economy. The IFO expects a technical recession in the first quarter of 2023, with a fall of 0.4% in GDP, after a decline of 0.2% in the fourth quarter of 2022.

The day before, the president of the influential German central bank, Joachim Nagel, had delivered a similar prognosis, judging “possible” an entry into recession at the end of this year and the beginning of 2023. “There are a number of ‘elements’ that lean towards this scenario, he told public radio.

According to the Ifo, the situation could only “normalize” in 2024 with “growth of 1.8%.

Average inflation is expected to climb to 9.3% next year, after 8.1% in 2022, according to the IFO. The Bundesbank predicts a surge in inflation to “more than 10%” over one year in December, and to “more than 6%” in 2023.

-Russian Gas-

“We are slipping into a winter recession,” summed up Timo Wollmershäuser, director of economic studies at this institute.

Gazprom has drastically reduced its gas deliveries in recent months to Germany, through Nord Stream, before completely stopping them at the beginning of September, against the backdrop of a showdown between Moscow and the European Union over the war in Ukraine.

Germany, which obtained 55% of its supplies from Russia before the war, must therefore obtain supplies elsewhere, at much higher prices.

These tensions have caused the price of gas and electricity in the country to explode, already high due to the post-pandemic recovery in 2021. And this movement is expected to continue. “Energy suppliers will significantly adjust their electricity and gas prices (…) in particular at the beginning of 2023”, estimates the IFO.

Result: inflation will continue to climb, to around 11% during the first quarter of 2023, severely affecting the purchasing power of households, the institute still predicts. The German government therefore adopted at the beginning of September a third plan of measures to help the most deprived. But this will not be able to compensate for the loss of purchasing power expected, estimates the IFO.

“The decline in real wages, of about 3% this year as well as next year, will be the highest since the introduction of national accounts in 1970”, anticipates Mr. Wollmershäuser.

According to the Check24 price comparator, a “typical household” with a consumption of 20,000 kWh paid in August 3,717 euros per year for its gas, i.e. an “average price of 18.6 cents per kWh”, i.e. an “increase of 185% “over a year.

-Wave of bankruptcies?-

Companies, less protected than households, are also sounding the alarm and calling for new aid.

The government has said it is preparing a new package of measures, but which will “not be comparable to those (granted) during the pandemic”, Finance Minister Christian Lindner said recently.

To deal with the health crisis, Berlin had spent lavishly, and put on hold the “debt brake, a constitutional principle which prohibits it from going into debt at more than 0.35% of GDP per year. But Berlin hammers to want to respect this rule from 2023, despite the colossal needs of the economy in the face of the energy crisis.

“I don’t believe in it (in a wave of bankruptcy)”, even if “certain branches could be forced to stop producing temporarily”, for his part declared the Minister of the Economy, Robert Habeck.

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