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In their joint forecast published on Thursday, they blame the coalition for the slump and warn against subsidies for individual sectors through industrial electricity prices.
However, there is good news for Germany regarding the inflation rate. According to flash estimates, inflation fell to 4.5 percent in September, the lowest value since Russia’s attack on Ukraine. The elimination of the fuel discount and the 9 euro ticket from the previous year’s comparative figures contributed statistically to the decline. The driver of inflation continued to be food. Although the Deutsche Bundesbank expects a further decline, it also sees inflation above the target value of around two percent in the medium term.
Concerned about “extreme ideas”
Economists are concerned about the changing political climate in the country and the fact that extreme ideas are spreading in society. This could cost growth and prosperity in the long term. “Something that was taken for granted in Germany until recently is currently in danger,” said Oliver Holtemöller, Vice President of the Halle Institute for Economic Research (IWH), in Berlin. “Namely a social climate that gives households and companies the confidence that the basic rules of our society are generally accepted and that these basic rules will therefore continue to exist in the future.”
Extreme ideas from both the right and the left are gaining ground, which call into question respect for all fellow human beings and for the property and freedom of action of others. “Even though the immediate economic risks of this trend may be limited, it still poses significant risks for long-term growth and prosperity prospects,” warned Holtemöller, referring to anti-immigrant attitudes. Germany is dependent on immigration because of its declining workforce.
Recovered more slowly than expected
Instead of the previously expected GDP growth of 0.3 percent, the institutes are now predicting a decline of 0.6 percent for the current year. “The most important reason for this is that industry and private consumption are recovering more slowly than we expected in the spring,” said Holtemöller. Growth is expected again in 2024, but at 1.3 percent it will be weaker than the 1.5 percent assumed in April. By 2025 it should be up to 1.5 percent. The joint diagnosis serves as a basis for the government to make its own projections, which in turn form the basis for the tax estimate.
“Germany has been in a downturn for over a year,” said Holtemöller. Although economic output is now back to the level reached before the start of the corona pandemic, it is being achieved by significantly more people in employment. “That means labor productivity has fallen sharply.” In order to change that, the experts are calling for improved location conditions, for example by reducing bureaucracy. On the other hand, an industrial electricity price capped with public money – in order to help individual energy-intensive companies, for example in the chemical industry – would be a “misguided approach”, warned the economic head of the Kiel Institute for the World Economy (IfW), Stefan Kooths. The government’s policies are unsettling private households and companies. “This makes economic planning more difficult and contributes to the economy not finding its way out of the downturn quickly,” said Holtemöller.
Arrived on the job market
“The economic weakness has now reached the labor market,” write the institutes. However, in view of the “notorious and, in the future, worsening staff shortages in many areas”, they only expect a “moderate increase” to 2.6 million unemployed in the current year – that would be around 174,000 more than in 2022. By 2025, the number is expected to fall to less than 2.5 million decrease.
The institutes have good news for consumers. “The situation on the price front is gradually easing,” says the report entitled “Purchasing power returns – political uncertainty high”. The inflation rate is expected to be 6.1 percent this year, but will fall to 2.6 percent in 2024 and fall further to 1.9 percent in 2025. “Wages have now responded to the inflation, so that the purchasing power of employees will increase again.” This stabilizes private consumption.
Difficult times for the construction industry
Difficult times are predicted for the construction industry. Due to increased financing costs, residential construction investments are likely to “decrease significantly into next year.” No big jumps are expected from exports for the time being either. “The economic downturn in important sales markets such as the euro area and China, where there is particularly less demand for consumer and intermediate goods, is slowing exports,” the institutes emphasized.
The joint diagnosis is prepared by the RWI in Essen, the Ifo Institute in Munich, the Kiel IfW, the IWH in Halle and the Berlin DIW, which is involved again after restructuring its in-house economic research.
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