The Halle Institute for Economic Research (IWH) has predicted Germany’s GDP will fall by 0.6 percentage points over 2023, a sharp revision to previous predictions.
One of the most-prominent economic organisations on the continent, the IWH has called its new forecast a “strong downward revision” of 0.9 percentage points. It cited a slower recovery in industry and private consumption than it had expected earlier this year.
“Germany has been in a downturn for more than a year,” said Oliver Holtemöller, vice-president and head of the macroeconomics department at the IWH. “The sharp rise in energy prices in 2022 put an abrupt end to the recovery from the pandemic. Consumer price inflation, which was already on the rise, has risen to over 8%. This is taking purchasing power away from private households. Key interest rates have risen by over four percentage points, hitting the construction industry in particular.”
He added: “Business sentiment has recently deteriorated again, not least because of heightened political uncertainty. Overall, the indicators suggest that production fell again noticeably in the third quarter of 2023. However, wage increases have meanwhile followed the price hike, energy prices have fallen, and exporters have partially passed on their higher costs, so that purchasing power is returning. Therefore, the downturn is expected to subside by the end of the year, and the degree of capacity utilisation will rise again going forward.”
The IWH has predicted German GDP will grow about 1.3 percentage points next year, climbing to 1.5% in 2025. Its 2024 prediction, it said, is 0.2 percentage points lower than the one forecast in spring. It predicted, too, that inflation will fall to 6.1% over this year, declining to 2.6% in 2024. Core inflation, it added, would be 6.1% in 2023 and 3.1% in 2024.
‘Sick man of Europe’
Last week Expert Investor wrote about Germany now being considered ‘the sick man of Europe’. Seven days ago, the OECD’s Interim Report September 2023: Confronting Inflation and Low Growth found global GDP advanced at an annualised pace of 3.2% in the first half of the year. While growth was strong in the US and Japan, however, it remained weak in Europe – particularly Germany.
Moreover, the OECD predicted Germany would see a 0.2% fall in its GDP, compared with increases of 1% in France, 0.8% in Italy and 2.3% in Spain. This came in the same week that Deutsche Bank CEO Christian Sewing warned Germany could potentially end up as the “sick man of Europe”.
The IWH’s forecast, which is distributed twice a year, is collated with the aid of the German Institute for Economic Research, the ifo Institute, the Kiel Institute for the World Economy, and the Leibniz institute for Economic Research. Despite this, new research suggests German investors hold 27% of the total fund holdings for private households across the European Union and the UK.