Ifo Institute Predicts Germany Will Face Recession in 2023

The German economy will shrink in 2023, as the dramatic rise in energy costs due to the Russia-Ukraine war has dampened recovery prospects following the pandemic crisis, the Ifo Institute announced on Monday.

The institute had forecast in June that the economy would grow by 3.7 percent in 2023, but now predicts that activity will decline by 0.3 percent. At the same time, it significantly raised its forecast for inflation in 2023 by six percentage points to 9.3 percent.

This year, the economy is expected to grow by 1.6 percent according to the latest Ifo estimates. In June, the institute had predicted a growth rate of 2.5 percent. Inflation is expected to be 8.1 percent this year, which is 1.3 percentage points higher than previously forecasted in June.

– Reduced gas supply from Russia during the summer and the consequent drastic price increases are destroying the economic recovery following the coronavirus pandemic – said Timo Wollmershaeuser, head of economic forecasts at Ifo.

The first quarter of 2023 will be particularly difficult for consumers as energy suppliers adjust prices due to high procurement costs, which will push inflation to around 11 percent, the institute reported. This will mean reduced purchasing power for households, Ifo warns, adding that the government package will soften the blow but will not fully offset it.

– The loss of purchasing power, measured by a decline in real wages per capita of about three percent this year and next, is the largest since the current system of national accounts was introduced in 1970 – said Wollmershaeuser.

During the next year, price growth is expected to gradually weaken, assuming there will be enough gas during the winter, Ifo notes, adding that energy prices should start to decline by spring 2023 at the latest. In 2024, the economy is expected to grow by 1.8 percent, and prices by 2.5 percent, the institute calculated.

The German economy nearly stagnated in the second quarter, supported by household and government consumption. In the first three months, activity grew by 0.8 percent compared to the end of last year.