The war in Ukraine slows down the growth of the German economy and accelerates inflation.

The Ifo Institute assumes this in its economic forecast published on Wednesday.

The Munich researchers now expect growth of 2.2 to 3.1 percent for this year.

In December they had predicted an increase of 3.7 percent.

"The Russian attack is dampening the economy through significantly higher raw material prices, the sanctions, increasing supply bottlenecks for raw materials and intermediate products and increased economic uncertainty," said Timo Wollmershäuser, head of the economics department at Ifo.

This in turn drives inflation.

Instead of the previously assumed 3.3 percent, consumer prices are likely to rise by 5.1 to 6.1 percent this year.

That would be the highest rate since 1982.

Svea Junge

Editor in Business.

  • Follow I follow

In the past week, other large economic research institutes had already lowered their economic forecasts significantly.

The Kiel Institute for the World Economy (IfW) almost halved its forecast for this year from 4 to 2.1 percent growth.

The RWI in Essen still expects an increase of 2.5 percent.

The IWH is the most optimistic: the people of Halle expect economic output to increase by 3.1 percent.

The forecasts of the institutes for the increase in inflation range between 4.8 and 5.8 percent.

According to the Ifo researchers, the first quarter should have gone well.

Only in March did the Russian attack on Ukraine dampen the economy.

The sanctions imposed on Russia, the increased energy prices and new supply bottlenecks have forced a number of important industrial companies to cut production and apply for short-time work.

The high energy prices also reduced the purchasing power of households: "Overall, the increase in consumer prices in the first quarter alone is estimated to result in a loss of purchasing power of around 6 billion euros," write the researchers.

Nevertheless, according to their estimates, economic output at the beginning of the year increased slightly by 0.5 percent, while the Kiel IfW, for example, assumes a decline of 0.9 percent.

Further development depends on energy prices

Due to the uncertainty about the further course of the conflict, the people of Munich calculated two scenarios for the further course of the economy this year - as they did after the outbreak of the corona pandemic in spring 2020.

In both cases, the economy is supported by consumption, which is likely to pick up again strongly in the spring with the corona easing.

In the optimistic scenario, which assumes economic growth of 3.1 percent, private consumer spending increases by 5 percent, in the pessimistic scenario by 3.7 percent.

However, the high inflation is having a dampening effect, explained Wollmershäuser.

The industrial economy is also weakening noticeably.

In the pessimistic scenario, industrial production could even fall in the second quarter due to high energy prices and supply bottlenecks.

Nevertheless, the industrial companies are still sitting on bulging order books.

The effects on unemployment, on the other hand, hardly differ.

The researchers expect an unemployment rate of 5 percent, but short-time work should “increase significantly” in the pessimistic scenario.

The optimistic scenario is based on the assumption that energy prices have already peaked and will gradually fall again in the coming months.

The price of oil would then gradually fall from the current 101 euros per barrel to 82 euros by the end of the year and the price of natural gas from 150 euros per megawatt hour to 108.

Oil could get even more expensive

In the pessimistic scenario, on the other hand, prices continue to rise for the time being and only fall in the second half of the year.

Oil could then rise to 140 euros per barrel by May and natural gas to 100 euros per megawatt hour.

At the end of the year, the oil price would fall to 122 euros per barrel in this scenario, and that of natural gas to 163 euros per megawatt hour.

The Munich economists did not calculate the effects of an embargo on Russian energy supplies in their forecast.

However, an interruption in energy supplies from Russia poses a major risk and would "cause much greater economic damage in the short term," said Wollmershäuser.

The likelihood of a recession is high.

For 2023, the Ifo expects growth of 3.3 to 3.9 percent.

Inflation will then drop to around 2.0 percent, explained Wollmershäuser.

The forecasts of the other major economic research institutes assume growth in the German economy of between 1.5 and 3.6 percent next year, with the RWI being the most optimistic and the IWH the most pessimistic.

According to their forecasts, consumer prices are likely to rise between 2.3 and 3.4 percent.

Keywords: