The German economy, in the red in 2023, could remain permanently weakened

German Chancellor Olaf Scholz (right) with his Economy Minister Robert Habeck in Berlin on May 31, 2023. MARKUS SCHREIBER / AP

Germany, long the economic engine of Europe, is tired. This weakness seems likely to be dangerously prolonged. According to forecasts by the Economic Institute of Munich (Ifo), published on Wednesday June 21, the continent’s largest economy is expected to register a recession of 0.4% in 2023. Two other renowned institutes – the IfW in Kiel and the DIW in Berlin – delivered similar predictions. The first foresees a recession of 0.3%, the second, 0.2%, for the current year.

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The anticipated decline is therefore clear, much more pronounced than what analysts expected in the winter of 2022. Relieved that the energy shock linked to the war in Ukraine has not plunged German industry into an existential crisis, the institutes had then counted on a strong rebound in activity in the summer of 2023, which should overcompensate for the effects of the winter slowdown. This burst will not happen. The real recovery is postponed to 2024, but growth should, again, remain modest: only 1.5%, estimates the Ifo, against 1.7% expected so far.

Germany is currently hit by a cocktail of negative effects, which explain why it is one of the red lanterns of the OECD countries. Due to the industry’s importance in its gross domestic product, it has been more affected than others by high energy prices. It is sensitive to the weak global economy. High inflation weighs on household consumption, which continues to live with a high savings rate. State expenditure linked to the management of the Covid-19 pandemic has fallen sharply. And construction, an effective growth relay in recent years across the Rhine, has collapsed under the effect of rising interest rates.

Aging of the population

Of course, some of these difficulties are temporary. The policy of the European Central Bank (ECB) to fight against inflation is showing its effects: the institutes are anticipating a sharp drop in price increases in Germany. According to the Kiel Institute, inflation should rise to 5.8% in 2023 and return to a rate of 2.1% in 2024, thanks to the drop in energy prices, which should have a positive impact on consumption. In this context, the ECB could decide to slow the rise in rates, which would encourage growth.

However, several elements suggest that the German engine is affected for a long time. Certain “made in Germany” specialties that consume a lot of energy, hit to the core by the gas and electricity crisis, have undoubtedly begun a lasting decline. “We anticipated that lower energy prices would bring some production back to the country. This does not happen. In chemicals, production remains 25% lower than its pre-crisis level,” underlines Timo Wollmershäuser, of Ifo.

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