Germany's recession to be 'milder than expected' in 2023

Imogen Goodman
Imogen Goodman - [email protected]
Germany's recession to be 'milder than expected' in 2023
People shop in Halle town centre ahead of Christmas. Photo: picture alliance/dpa | Heiko Rebsch

Germany's recession is expected to be milder than previously predicted, Munich's Ifo said on Wednesday - the first major economic institute to issue a brighter outlook for Europe's biggest economy.


Economic output growth is expected to shrink by 0.1 percent in 2023, Ifo said, revising its previous prediction of a 0.3 percent contraction.

Rocketing energy prices in the wake of Russia's war on Ukraine have led to sky-high inflation that have hurt Germany's consumers and export-dependent industries.

But inflation is expected to slide from 7.8 percent in 2022 to 6.4 percent in 2023, as government measures to clamp down on energy prices take effect.

This includes the forthcoming price caps on gas and electricity for businesses and consumers, which are expected to have a knock-on effect on other consumer prices as they start to lower operating costs. 

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Demand for goods in the manufacturing sector is also still strong with order books so well filled that production has "risen slightly until very recently", noted Ifo.

Timo Wollermershäuser, head of forecasts at Ifo, noted that Germany's output already came in at a better-than-expected 0.4 percent growth for the third quarter.

While the subsequent two quarters are likely to show contractions, "after that, things will start to pick up again", he said, predicting growth of 1.6 percent for 2024.

Ifo's positive outlook came a day after a closely watched survey showed German investor confidence rising again in December.

The ZEW institute's economic expectations index gained 13.4 points compared to November -- the third consecutive increase after months of decline.

Why is the tide turning? 

Economists believe that measures to dampen rising prices have given businesses and consumers a new boost of confidence in recent weeks. 

At the end of September, the German government unveiled a €200 billion ($210 billion) support package to mitigate the impact of the energy crisis, including a cap on gas prices for businesses and households.

At the time, Chancellor Olaf Scholz (SPD) described the stimulus as a "Duppel-Wumms", or "double-whammy" for the German economy.

READ ALSO: German word of the day: Doppel-Wumms

The expectation of financial relief had an almost immediate impact on business confidence, with a key Ifo survey charting an increase in industry's mood in October for the first time in four months.

This positive trend has continued in November and December, prompting economists to revise some of their gloomiest forecasts. 

After the release of November's survey, Carsten Brzeski of ING bank said the Ifo survey "adds to recent glimmers of hope that the German economy might avoid a winter recession."

But he added the government stimulus "will come too late to prevent the economy from contracting in the fourth quarter.

"However, it is substantial enough to cushion the contraction and to turn a severe winter recession into a shallow one."

This tallies with the government's own forecasts: despite the dampening effect of the relief measures, the Economics Ministry predicts that the economy will contract by around 0.4 percent in 2023.

With reporting by AFP


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