Germany will grow less due to the war in Ukraine and will enter a recession in 2023 if the supply of Russian gas is cut off

Germany's economy will grow less than initially expected in 2022 as a result of the war in Ukraine, the most severe impact of which could result in a recession in 2023 if the supply of Russian gas is cut off, according to the forecast of the country's main economic institutes.

“There is no good news to announce,” summarized Stefan Kooths, vice-president of the Kiel Institute for World Economy (iFW Kiel), one of those who presented his forecasts on Wednesday in Berlin.

Kooths admitted that the Russian invasion of Ukraine has resulted in “added stress to international supply chains” of raw materials and goods, which were already being impacted by worldwide restrictions imposed by the pandemic.

According to the five economic institutes that submitted their spring forecasts, the growth of the German economy will slow dramatically in 2022 as a result of the war, to 2.7% or only 1.9% if imports of Russian gas are suspended, which would cause the country to enter recession in 2023.

All of them believe that the war will have a clear impact on the behavior of Gross Domestic Product (GDP), thus lowering their forecast from the 4.8% they expected in 2022 before the war and believe that inflation will be 6.1%, the highest in 40 years.

The institutes consider that the removal of restrictions imposed by the pandemic brings some relief to the economy of the first European power, but the consequences of the war will be felt in 2022, although in 2023 they expect a recovery of 3.1%, according to what they call the “grassroots scenario”.

“The recovery process of the German economy is again delayed. The situation is characterized by flows in opposite directions, which have an upward effect on prices,” Kooths said.

The “baseline scenario” foreseen by experts is a 2.7% increase in GDP this year, which is reduced to 1.9% if there is a cut in Russian gas shipments to Germany, which is 40% dependent on imports from that country.

The institutes explain their sharp downward revision due to the war in Ukraine and the “unfavorable” evolution of the pandemic during the northern winter; although in 2023 they forecast a 3.1% increase in GDP if there is a gas supply cut from Russia there would even be a drop of 2.2%.

Last autumn, the institutes were confident that in 2023 there would be a return to moderate growth rates, with a 1.9% increase in GDP, but the circumstances imposed by the war in Ukraine on Russian gas supplies to Germany have changed the basis of studies.

The cumulative loss of GDP in the event that Russian gas shipments to Germany are finally suspended in both 2022 and 2023 is estimated at around 220 billion euros, which corresponds to more than 6.5% of the German economy's capacity.

“If the gas supply stops, the German economy is threatened with a severe recession. In terms of economic policy, then it would be important to support productive structures with market possibilities without stopping structural change,” according to Kooths.

The expert commented that this structural change will have to be applied in gas-intensive industries even without the suspension of imports from Russia, since dependence on that country “must be overcome anyway”.

Kooths, representing all the institutes, considered that aid to households to compensate for the increase in energy prices, such as those announced by the Government of Chancellor Olaf Scholz, should be done “in a very specific way” since if it is done broadly it will have effects on inflation.

If aid to households is made on a widespread basis, problems will occur in low-income households and “the overall economic cost will increase”.

By 2022, the institutes have record inflation of 6.1%, which is the highest rate in the last forty years; with a suspension of Russian gas deliveries inflation could soar to 7.3%, the maximum value ever reached by the Federal Republic.

In 2023 they also expect inflation to remain high, at 2.8 per cent, a figure that the institutes raise to 5 per cent in the event of suspension of imports of Russian gas, “clearly above the average since reunification,” the institutes say in a joint statement.

As for unemployment, the baseline scenario forecasts for 2022 and 2023 a rate of 5% (compared to 5.7% forecast in 2021) that would worsen to 5.2% and 6% respectively if Russian gas deliveries are suspended.

The forecasts of the evolution of the German economy are presented by the DIW institutes in Berlin, the Ifo in Munich, the iFW in Kiel, the IWH in Halle and the RWI in Essen.

(With information from EFE)

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