ECONOMIC OUTLOOK FOR 2023 AND 2024

(1) The outlook for the German economy has improved slightly compared to the GCEE's economic forecast of November 2022. The GCEE expects gross domestic product (GDP) to grow by 0.2 % in 2023. ITEM 25 CHART 2 The short-term downside risks to economic growth have declined. Most notably, uncertainty about energy supplies has receded for the time being, leading to a decline in wholesale energy prices. For example, the average price of natural gas in Europe (EGIX THE) in the first half of March 2023 was around €46 per MWh, around 80 % lower than at its peak in August 2022. ITEM 8

Inflation - as measured by the German consumer price index (CPI) - fell from 8.8 % year-on-year to 8.1 % in December 2022. It climbed back to 8.7 % in January and February 2023. Core inflation has continued to rise year-on-year in January and February 2023 and amounted to 5.6 % and 5.7 %, respectively. This suggests that inflation will decline only gradually and remain elevated throughout the forecast horizon. ITEMS 28 F. The resulting loss of purchasing power is weighing on private consumption expenditure. As monetary policy continues to tighten, rising interest rates exacerbate this development and, in conjunction with  sustained high economic uncertainty, dampen business investment. Against this background, the GCEE expects the economy to grow by 1.3 % in 2024. The GCEE forecasts 6.6 % and 3.0 % inflation this year and next year, respectively.

(2) Although the energy supply situation has eased for the time being, the energy crisis is not over. In the winter of 2022/23, Germany averted a gas shortage with state-ordered rationing. CHART 1 Russian supplies of natural gas were partly replaced by additional imports from other European countries. In addition, exports to neighbouring countries were reduced. At the same time, natural gas consumption decreased by 14 % in 2022, relative to the average consumption in the past four years (Federal Network Agency, 2023a). The decrease reflected both savings of private households and industry, and relatively mild winter temperatures. In the energy-intensive industry sectors, a seasonally and calendar adjusted decrease in production of 12.8 % between January 2022 and January 2023 contributed to these savings. Since wholesale energy prices are expected to stay permanently above their level in the period between 2010 and 2019 according to futures prices (JG 2022 item 302), a full recovery of output in energy-intensive industries is not anticipated. Besides, there remains a downside risk of a gas shortage for the German economy in the winter of 2023/24. ITEM 30

(3) Consumer price inflation has probably peaked in Germany and many other advanced economies. Last year, consumer energy prices increased particularly strongly, but are now likely to be dampened by falling wholesale energy prices. ITEMS 9 and 16 However, prices of many goods and services are continuing to rise by more than 2 %, which is the medium-term inflation target of many central banks. Chart 1 Further increases are expected since the costs of downstream producers continue to rise. For example, German producer prices for domestic consumer goods rose by 1.8 % in January 2023 compared to the previous month. Effective wages are expected to rise by 5.9 % and 4.5 % in 2023 and 2024, respectively. Higher labour costs, in turn, are expected to result in rising consumer prices, especially for services. ITEM 28

(4) The inflation outlook suggests that central banks will continue to raise interest rates in the US and the euro area in the upcoming months. ITEM 10 BOX 2 In the euro area in particular, monetary policy tightening is thus stronger than financial markets expected in autumn 2022 and than forecast(ed) in the GCEE Annual Report 2022. ChART 1 The first real economic effects of rising key policy rates became apparent in the sharp decline in new home construction loans to private households. Their volume in January 2023 was 38.1 % lower than in the previous year. The monetary tightening is likely to broadly affect consumer prices only in the upcoming months, but probably before the end of the year. Compared to the US, where indicators for consumption and the labour market continue to rise and necessitate a strong reduction in demand, BOX 1 a smaller reduction will likely suffice in the euro area to reduce inflation (Koester et al., 2023).

Persistent inflation remains a risk for the economic outlook in the euro area. ITEM 12 If the expected increases in key interest rates fail to bring consumer price inflation back onto a path towards the ECB's medium-term target of 2 %, an even stronger monetary policy response may become necessary. This could lead to a decline in bank lending, for instance due to increased loan loss provisions or rising loan defaults. In addition, business investment could fall as a result of higher interest rates. This could further depress economic activity in 2024. At the same time, the financial market risks that have emerged in recent weeks make it more difficult for the central bank to fight inflation. This could lead to an insufficient monetary policy response. ITEM 10

Chart 2 Updated Economic Outlook for the years 2023 and 2024 at a glance

GDP in Germany and the euro area

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Key economic indicators (in %)

1 – Forecast by the GCEE.  2 – Constant prices.  3 – Change on previous year.  4 – Registered unemployed in relation to civil labour force.  5 – Gross wages and salaries (domestic concept) per employees hour worked.  6 – In relation to nominal GDP; regional authorities and social security according to national accounts.  7 – Values are based on seasonal and calendar-adjusted quarterly figures.  8 – Harmonised Index of Consumer Prices.

Sources: Eurostat, Federal Statistical Office, national statistical offices, own calculations

© Sachverständigenrat | 23-050-02-2

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(5) In the short term, the inflation-induced loss of purchasing power remains the main burden for the economy in Germany and most other euro area member states. CHART 1 Catch-up effects after pandemic restrictions were lifted have boosted consumption until autumn 2022, especially in contact-intensive services. ITEM 31 These catch-up effects are now likely to fade. Since the winter of 2022/23, the negative effects of real income losses have become visible, for example in the decline in hotel and restaurant sales by 16.4 % between October and December 2022 (adjusted for price, seasonal and calendar effects). In contrast, rising employment, a declining household savings rates and extensive fiscal policy measures support demand. Real disposable income is expected to increase only in 2024 when wages increases will exceed the decreasing inflation rates, allowing for higher consumption expenditure. ITEM 31

(6) The global economic outlook has improved slightly compared to autumn 2022. CHART 1 ITEM 11 In particular, China's exit from its zero-Covid policy should increasingly foster global economic growth. BOX 1 Therefore, the GCEE is revising its forecast for global GDP growth in 2023 upwards by 0.3 percentage points to 2.2 %. Next year, growth is expected to increase to 2.7 %. In addition, bottlenecks in intermediate goods are expected to continue to ease. BOX 2 German exports of goods should therefore gain more momentum in 2023 than expected in autumn 2022. ITEM 36 However, there are several risks for the global economy. If the US economy cools down more than expected, for example due to increased monetary tightening, this would affect economies in other world regions. In particular, this could slow down the Chinese industry, which is just recovering and is important for the global economy. Conversely, higher production in China could increase prices via rising demand for commodities such as metals or energy sources. ITEM 13 There is also a risk that geopolitical tensions between the US and China could have an impact on the global economy - especially if sanctions or higher tariffs are imposed on some commodities and products. ITEM 22

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