German economy to shrink in 2023

The German economy will contract in 2023, two leading economic institutes said Thursday, revising down earlier forecasts after persistently high inflation contributed to a weaker-than-expected start to the year.

Europe’s largest economy is expected to shrink by 0.2 per cent this year, the Berlin-based DIW institute said, after previously predicting modest growth.

Germany’s IfW Kiel economic institute now sees a contraction of 0.3 per cent, down from a previous forecast of 0.5 per cent growth.

The downgrades come after Germany fell into a mild recession in the final months of 2022 and the start of 2023, as inflation and higher interest rates curbed consumer demand.

Strong wage growth and gradually slowing inflation are expected to drive a recovery in the later half of the year, both institutes said, but not enough to offset the winter surprise.

“Prices that are no longer rising quite as strongly, increasing real incomes, a robust labour market and higher consumer spending are likely to be the key to economic recovery in the course of the year,” said the DIW’s Timm Boenke.

For 2024, the DIW expects “solid economic growth” of 1.5 per cent, powered by private consumption.

The IfW is even more optimistic, pencilling in 1.8 per cent expansion.

Much depend will on the path of inflation in the coming months, the DIW’s Geraldine Dany-Knedlik said.

The inflation danger “is not completely eliminated,” she warned.

“Continued high inflation and subsequently rising interest rates could choke off the recovery of the German economy.”

The German government, in its most recent forecasts issued in April, was still forecasting economic growth of 0.4 per cent for 2023.