German inflation ‘to rise in 2023 as economy shrinks’

The German economy will contract in 2023 as inflation continues to rise on the back of soaring energy prices, the country's leading economic institutes said in a forecast published Thursday.

A woman holds cash in her hand.
A woman holds cash in her hand. Photo: picture alliance/dpa | Daniel Karmann

The pace of consumer price rises would “increase further over the coming months”, coming in at 8.4 percent for 2022 as a whole, the think tanks said in a joint statement.

Inflation would rise further to 8.8 percent in 2023, driven by the rising price of energy, which has soared in the wake of the Russia invasion of Ukraine, as Moscow has dwindled supplies to Europe.

The think tanks that produced the estimates were the DIW German Institute for Economic Research, the Ifo institute, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the RWI Leibniz Institute for Economic Research.

In August, inflation in Germany sat at 7.9 percent, with new figures for September set to be published later on Thursday.

The high cost of energy was the main factor “driving Germany towards recession”, Torsten Schmidt, head of economic research at the RWI think tank, said at a press conference.

READ ALSO: Fears of a recession in Germany as business confidence falls

Europe’s largest economy would already shrink over the second half of 2022 “before moving into a recovery phase early next year”, Schmidt said.

The economic institutes almost halved their forecast for growth this year to 1.4 percent from 2.7 percent, as the economy felt the impact of the conflict in Ukraine.

German GDP would subsequently shrink by 0.4 percent in 2023, down from their previous estimate of 3.1 percent growth made in April, before bouncing back to growth in 2024.

The shock currently being suffered by the economy would continue “for a very long time”, Schmidt said.

Forecasters’ worst fears in the event of an early shut-off in Russian gas supplies have not been realised, with Germany building gas reserves which are expected to see it through the winter without acute shortages.

But German growth has stalled, increasing by a fractional 0.1 percent between April and June, while key economic indicators have signalled worse to come with the winter looming.

Consumer confidence, as measured by the pollster GfK, has fallen to an all-time low as households reckon with swelling energy bills and growing inflation.

The prediction made by the German institutes was slightly more optimistic than a forecast earlier this week by the OECD, which predicted that Europe’s biggest economy would shrink by 0.7 percent in 2023.

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Germany reaches agreement on Bürgergeld – with a couple of catches

Members of Germany’s traffic light coalition government and the opposition Christian Democratic Union party have reached an agreement in the dispute over plans for a new citizens‘ income. There will be tougher sanctions against benefit recipients and fewer discretionary assets.

Germany reaches agreement on Bürgergeld - with a couple of catches

Last week, the German government’s plans to reform unemployment benefits with its new “Bürgergeld”, or citizens’ income, proposals were blocked in the Bundesrat.

The legislation was held up mostly by members of the Christian Democratic Union (CDU/CSU) which had been strongly opposed to the proposals for a six-month Vertrauenszeit (trust period) in which benefits claimants would not incur sanctions, as well as to the amount of assets recipients would be able to hold on to.

READ ALSO: EXPLAINED: Will Germany’s controversial Bürgergeld still come into force?

On Tuesday, politicians from the traffic light coalition parties and the CDU/CSU reached a compromise on the proposed reforms which means that some of the key measures will be scrapped.

No trust period

The CDU/CSU was able to push through its demand for more sanctions for recipients and the six-month trust period will now be scrapped completely.

Instead, it will be possible to enforce benefit sanctions from the first day of an unemployment benefits claim if recipients don’t apply for a job, or fail to turn up for appointments at the job centre, for example.

The CDU and CSU also demanded that unemployment benefits recipients be allowed to keep less of their own assets when they receive state benefits. The original plan had been for assets worth up to €60,000 to be protected for the first two years, but the compromise reached has knocked this down to €40,000 for one year – during which time benefits recipients will not have to use up their savings.

Following the announcement of the agreement, Green Party later Britta Haßelmann said “I regret it very much”. According to Haßelmann, the trust period was the core of the reform designed to stop people from having to take up “just any job”.

READ ALSO: Bürgergeld: What to know about Germany’s unemployment benefits shake-up

Other traffic light colleagues were more optimistic, however. Katja Mast from the SDP spoke of a “workable compromise in the spirit of the matter,” while FDP Parliamentary Secretary Johannes Vogel said that it had succeeded in “making a good law even better”.

CDU/CSU leader Friedrich Merz, meanwhile, sees the compromise as a great success for his party, though he also praised the willingness of the parties in the government to reach an agreement.

“The coalition was very quick and – to my surprise – very largely willing to make compromises here,” Merz said. 

What happens next?

Tomorrow, the Mediation Committee of the Bundestag and Bundesrat will meet to discuss the proposals. If the agreement is confirmed, the welfare reform could clear the final hurdle when it is voted on Bundesrat again at the end of the week. According to the federal government’s plans, if it’s approved, Bürgergeld will come into force in January and replace the current Hartz IV system.