The supply bottlenecks in industry and the fourth corona wave are slowing down the recovery of the German economy.

The Munich-based Ifo Institute lowered its growth forecast for 2022 by 1.4 percentage points to 3.7 percent.

The economists at the Halle Institute for Economic Research (IWH) are even assuming an increase in GDP of only 3.5 percent.

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If the Ifo researchers have their way, the growth should be caught up in 2023.

Then they forecast an increase in economic output of 2.9 percent.

In September they had expected the gross domestic product (GDP) to rise by 1.5 percent.

"The strong recovery initially expected for 2022 will be postponed further," said Timo Wollmershäuser, Head of Economic Forecasts at the Ifo Institute.

The IWH, on the other hand, only expects growth of 1.8 percent in 2023.

Corona restrictions affect the buying mood

It is likely to be uncomfortable for the German economy in the current final quarter.

Increasing numbers of infections and the new Omikron variant are clouding consumption.

Not only the stricter restrictions for unvaccinated people put pressure on the buying mood, vaccinated people also increasingly avoid shopping streets and restaurants for fear of infection.

At the same time, the decline in consumption will not be as strong as it was last year, when politicians imposed a lockdown, economists expect.

In addition, there are ongoing supply bottlenecks in the industry.

The order books are full, but there is a lack of material to process them.

The Ifo Institute therefore expects economic output to decline by 0.5 percent compared to the previous quarter.

Despite the damper, the German economy will grow by 2.5 percent in the second and third quarters of the full year 2021 according to Ifo and by 2.7 percent according to IWH estimates. 

Strong recovery in the summer half-year

"From spring onwards, the number of infections is likely to continue to decline due to the season, and private consumption will expand significantly again," said Oliver Holtemöller, Head of the Macroeconomics Department and Vice President of the IWH.

Ifo economic chief Wollmershäuser also expects a “strong recovery” to set in in the summer when the corona wave subsides and supply bottlenecks gradually subsided.

GDP should then increase significantly by 2.3 and 1.8 percent in the second and third quarters of 2022, he said.

However, both economists also emphasized the dangers for the economy. Holtemöller sees the uncertain progress of the pandemic as the main risk for economic development in Germany. He warned that if a strict winter lockdown occurs, as it did a year ago, a correspondingly significant decline in production would also be expected. "For the rest of the year it will be decisive how manageable the Omikron variant is," said Holtemöller. But delivery bottlenecks also remain a risk factor.

According to economists, the inflation rate will remain high next year - it could even increase slightly again.

While the IWH is forecasting an increase in consumer prices of 3.1 percent for this year and next, the Ifo Institute even expects the inflation rate to rise to 3.3 percent in 2022. The ongoing supply bottlenecks and the associated cost increases as well Delayed adjustments to the increased energy and raw material prices played a driving role, explained Wollsmershäuser.

Fuest: The ECB has to react

Ifo President Clemens Fuest called for the ECB to respond to this. She must initiate a turnaround in her monetary policy and melt down the bond purchase programs. A continuation of the bond purchases beyond the spring is "incompatible" with the current inflation and economic development. The rise in consumer prices is not expected to normalize again until 2023 and decline to 1.8 percent. The IWH economists in Halle are still reckoning with a high rate of 2.5 percent.

The crisis continues to put pressure on the treasury. The IWH expects a budget deficit of around 147 billion euros this year, the Munich economists of the Ifo expect a deficit of 162 billion euros. Economists agree that the deficit will decrease significantly in the next few years. How strong the decline will ultimately be, however, also depends on when and to what extent the projects from the traffic light coalition agreement are implemented, said Wollmershäuser.

Ifo President Fuest assessed the planned supplementary budget of the new Finance Minister Christian Lindner (FDP) in the amount of 60 billion euros as positive.

"In the current situation, it is right to take on debt for investments," said Fuest.

However, it must be ensured that the money actually flows into investments and is not shifted to consumption via secondary budgets.

Nevertheless, it is important not to finance all investments through debt.

Spending would have to be prioritized and increases in expenditure slowed down.

The reintroduction of the catch-up factor in pension policy planned by the Ampel coalition is therefore to be welcomed.