German economy seen shrinking next year due to energy crisis

GERMANY’S economy will likely contract by 0.4 per cent next year due to the impact of the energy crisis, said the nation’s leading research institutes, who slashed their forecast from April of a 3.1 per cent expansion.

German output will be 160 billion euros (S$222.8 billion) lower this year and next than projected 5 months ago – partly due to the drastic increase in energy costs, the 4 institutes predicted on Thursday (Sep 29) in a twice-yearly report which the government uses as guidance for its own outlook.

“The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump in the German economy,” said Torsten Schmidt, head of economic research at the RWI Institute and spokesman for the Joint Economic Forecast Project Group.

Germany is one of the countries hardest hit by the energy emergency triggered by the Ukraine war, thanks to a reliance on Russian fuel imports built up over decades. Chancellor Olaf Scholz’s ruling coalition is racing to cut back that dependence but Germany still faces a tough winter with the prospect of gas rationing and blackouts.

The government has assembled 3 packages of aid measures worth nearly 100 billion euros to offset the impact on households and companies, but has also cautioned that it does not have the resources to ease the pain completely.

“Record inflation rates, especially exploding energy prices, are hitting many companies hard,” Martin Wansleben, managing director of the DIHK industry lobby, said on Thursday in a statement.

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“The consequences are production stops, losses in value creation, the relocation of production abroad and even plant closures,” he added. “The number of companies that either do not receive any energy supply contracts at all or only receive them at extreme prices is currently increasing.”

Although the energy crunch is expected to ease over the medium term, gas prices are likely to remain well above pre-crisis levels, meaning “a permanent loss of prospe­rity for Germany”, the institutes warned.

They cut their growth estimate for this year to 1.4 per cent from 2.7 per cent, and said they expect inflation to accelerate in coming months, climbing to an average rate of 8.8 per cent next year – from 8.4 per cent this year – before gradually falling back towards 2 per cent in 2024.

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Europe’s biggest economy will likely return to growth in 2024, with expansion of 1.9 per cent, the institutes predicted.

The 4 institutes which compile the twice-yearly forecasts are Munich-Based Ifo, IfW in Kiel, IWH in Halle and the Essen-based RWI. The Wifo and the IHS institutes in Vienna also contribute. The government is expected to publish updated economic projections next month. BLOOMBERG