The German economy can no longer escape a recession.

Leading economic research institutes are now assuming the same.

The Leibniz Institute for Economic Research Halle (IWH) forecasts that the German gross domestic product (GDP) will shrink by 1.4 percent in 2023, after growing by 1.1 percent this year.

“The German economy is facing a recession.

The reason is the enormous increase in the price of fossil fuels,” write the Halle economists.

Svea Junge

Editor in Business.

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In its updated economic forecast, the Kiel Institute for the World Economy also expects a minus next year.

Accordingly, GDP will shrink by 0.7 percent next year.

"The German economy is in a downward spiral," write the economists.

It will “slide into a recession, in a phase in which it was just recovering from the setbacks caused by the pandemic”.

According to the Kiel-based company, growth this year will remain above zero with a total increase of 1.4 percent.

In the summer they still assumed that the economic upswing would prevail despite the burdens caused by the war in Ukraine and that gross domestic product would rise by 2.1 percent this year and by 3.3 percent next year.

The Kiel-based company explained that the recent jumps in electricity and gas prices would noticeably reduce the purchasing power of private households and lead to a decline in private consumer spending.

They see the cooling global economy as an additional burden: "In addition, the global economic outlook, which has been clouded over since the summer, will noticeably dampen not only exports but also investment activity," they warn.

Falling energy prices not until 2024

As growth slows, inflation is likely to rise further.

"If electricity and gas prices remain high for an extended period - as is currently emerging - inflation is expected to rise from a record 8 percent this year to 8.7 percent in 2023," the statement said IfW forecast: The market prices for electricity and gas only reached consumer prices with some delay.Economists do not expect energy prices and thus inflation to fall until 2024.

The Halle economists from the IWH are even expecting 9.5 percent inflation next year, after 7.9 percent this year.

Industrial companies are losing international competitiveness due to the high energy costs, warned Oliver Holtemöller, head of the Macroeconomics department and Vice President of the IWH.

However, the bulk of the burden will come from increases in heating and electricity costs in private households, even if politicians are trying to provide financial support for those sections of the population that are particularly hard hit.

"Private households will be forced to reduce their other consumer spending, which will result in a decline in overall economic production," said Holtemöller.

The IfW also warns of a "considerable loss of purchasing power" in private households.

"Their purchasing power is likely to fall by 4.2 percent in the coming year, more than ever before in reunified Germany, and as a result private consumption will shrink well into the coming year," write the people from Kiel.

The IfW economists also see the euro zone heading for a recession.

They predict that overall economic production will probably shrink slightly for a few quarters.

For 2022, economists are expecting an overall GDP increase of 3 percent in the euro area, followed by stagnation in 2023. According to the forecast, inflation will rise by 8.1 percent on average for the year and thus more strongly than at any time since the monetary union came into existence .

At 7.2 percent, the rate of inflation in 2023 will still be well above the 2 percent target set by the ECB.

Gas availability as the biggest risk

The Essen RWI also cut its forecast on Thursday.

For this year, the Essen researchers expect an increase in GDP.

For 2023, however, the RWI lowered its forecast from 2.7 to 0.8 percent and, unlike the IfW and IWH, is still assuming positive growth.

The researchers in Essen are also more confident with regard to the development of inflation.

After an average rate of inflation of 7.3 percent, they are already expecting a drop to 3.5 percent next year.

"The greatest risk for the German economy is the availability of gas during the coming winter," said RWI economics boss Torsten Schmidt. If gas supplies from Russia were to be completely stopped, it would be important for companies, and especially private households, to reduce their gas consumption significantly If that doesn't succeed, a noticeable rationing of gas would lead to further significant restrictions on economic production, said Schmidt.