German economy expected to contract by 0.4% in 2023

The German economy will contract by 0.4 per cent in 2023.

"Contrary to previous expectations, the recovery is likely to fail to materialise in the second half of 2023," said Ifo Institute's head of forecasts Timo Wollmershaeuser, according to Reuters.

Germany is the single major economy globally for which a contraction is forecast in 2023.

"In the current ranking of our forecasts, Germany is in the worst position," Wollmershaeuser said.

This was because Germany had not benefited from the post-pandemic services sector boom as much as other European countries, where this sector plays a bigger role, he said.

"The economic shocks currently hitting the global economy may hit Germany particularly hard because they affect industries that are particularly important for Germany," he said.

Ifo forecasts a 0.2 per cent contraction in gross domestic product (GDP) in the third quarter, after stagnation in the second quarter. "But we are not expecting a dramatic recession," Wollmershaeuser said.

Ifo is nonetheless sticking with its 2023 forecast because Germany's statistics office revised its economic assessment of the first quarter of the year to a 0.1 per cent GDP decline from a prior estimate of a 0.3 per cent drop, Wollmershaeuser said.

"Without this revision, we would have lowered the forecast for economic growth this year by 0.3 percentage points to minus 0.7 per cent," he said.

For 2024, the economic institute expects a 1.4 per cent expansion, 0.1 percentage points less than previously forecast. In 2025, growth would be 1.2 per cent, it said.

The bright spot is private consumption, which should gradually recover in the second half of this year.

"The increase in disposable household income will remain strong," Wollmershaeuser said. With inflation rates slowly falling, there will be an increase in purchasing power, he added.

Inflation is forecast to ease slowly from 6.9 per cent in 2022 to 6.0 per cent this year, then further to 2.6 per cent in 2024 and 1.9 per cent in 2025.

Wollmershaeuser expects the European Central Bank to start cutting interest rates at the end of next year, in response to lower inflation.

The number of unemployed will initially remain elevated at 2.59 million people this year and 2.58 million next year. In 2025, unemployment should fall to 2.43 million people, according to the Ifo forecasts.

The increase in unemployment will be due to insolvencies, companies leaving Germany and some sectors cutting jobs.

Due to the shortage of workers, those people would be able to find jobs, Wollmershaeuser said. But the adaptation of skills and qualification for a new job takes time, he added.