Energy price crisis likely to push Germany into recession in 2023 – economists

High energy prices and supply chain challenges affecting large parts of the industry are paving the way for Germany to enter a recession, an analysis by private industry-sponsored economic research institute IW has found. The country is experiencing “historic” inflation rates driven by skyrocketing gas and electricity costs, which will cause Germany’s gross domestic product (GDP) to contract by 1.75 percent next year, the institute said. “The German economy is facing tough times,” the IW commented, adding that businesses not only fear further price rises but also face the severe risk of being cut-off from supplies. The inflation trend that started in the wake of the Covid-19 pandemic recovery had been greatly exacerbated by Russia’s war on Ukraine, which according to the IW will likely persist until at least next year: “For the German economy, this means energy will remain expensive.” But persisting supply chain problems that occurred in the context of the coronavirus pandemic have also contributed to industry woes, as crucial basic materials are in short supply or cannot be procured on time. Moreover, the country faces a severe lack of skilled workers in several industries, adding further pressure on companies’ business prospects. “All signs indicate that Germany is entering a recession without any control,” IW director Michael Hüther said. He argued the government should support households and companies struggling to pay their energy bills and called for also suspending Germany’s national “debt brake” next year to give the government sufficient financial leeway for handling the crisis.
The inflation rate in Germany is expected to average 8 percent this year and researchers expect rates to reach at least 5 percent in 2023. Rising prices for gas, oil and electricity are slowing down private consumption and cause hesitance among companies to invest in new production capacities or energy transition technologies needed to gear the economy towards climate neutrality, said IW.

The IW's analysis joins a chorus of increasingly dire forecasts for the German economy, with Deutsche Bank analysts warning of a possible recession already in July. A more recent analysis by Deutsche Bank and estimated the expected GDP contraction to lie between 3 and 4 percent in 2023, warning that the current shock "shock could well mark the starting point for accelerated deindustrialisation in Germany." A survey among German industrial companies relased in early September found that the vast majority of companies are strongly or very strongly affected by the energy crisis, with about one third fearing they could be forced out of business.