9.3 percent inflation in 2023: Ifo sees rising inflation and drastically lowers economic forecast

Created: 09/12/2022, 14:47

By: Thomas Schmidtutz

Container transporter in the port of Hamburg: The economic prospects for the German economy continue to cloud over.

© Christian Charisius/dpa

The Munich-based Ifo Institute assumes that inflation rates will continue to rise and economic output will shrink in Germany.

Munich - The Munich Ifo Institute has drastically lowered its economic forecast for this year and next, primarily because of the high gas prices.

In the coming year, the institute expects economic output to shrink by 0.3 percent, for this year only 1.6 percent growth.

"We are going into a winter recession," said the head of the Ifo economic forecasts, Timo Wollmershäuser, on Monday.

However, the Ifo does not expect any serious effects on the labor market.

As recently as June, the institute had forecast growth of 3.7 percent in 2023: 4.0 percentage points more than currently.

The institute even increased its inflation forecast by 6.0 percentage points to 9.3 percent in the coming year.

According to the economic researchers, inflation will peak in the first quarter of 2023 at around eleven percent.

The forecast for the current year lowered the Ifo from 2.5 percent growth to 1.6 percent.

The economists now expect the inflation rate to be 8.1 percent instead of 6.8 percent.

Economy: Energy crisis hits economy

"The cuts in gas supplies from Russia in the summer and the resulting drastic price increases are ruining the economic recovery after Corona," explained Wollmershäuser.

The high rates of inflation caused the real income of private households and their savings to melt away and reduced their purchasing power.

According to Ifo, the ongoing delivery problems with raw materials and intermediate products are hampering production in industry.

At the same time, high prices and the global economic downturn are reducing demand.

Nevertheless: the order books of the companies are still well above average - the mood in the industry has only deteriorated slightly.

Economy: The situation in construction is clearly clouding over

In contrast, the Ifo sees a “significant downturn” in the construction industry.

In addition to the high construction costs, the main reasons are the interest rate hike by the ECB, which is also driving up financing costs.

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Ifo: "Going into a winter recession"

IfW: Energy prices and demographics are curbing growth for longer

The Ifo expects that German energy suppliers will increase their electricity and gas prices, especially at the beginning of 2023 - hence its forecast of eleven percent inflation.

"As a result, real household incomes will fall sharply and purchasing power will drop noticeably," explained Wollmershäuser.

The federal government's measures from the third relief package are likely to counteract this decline somewhat, but by no means offset it.

"In the further course of the coming year, the price increase will gradually weaken," the Ifo expects.

It is assumed that gas is available in sufficient quantities in winter.

For this reason, energy prices should not continue to rise and should fall again by spring 2023 at the latest.

Looking ahead to the second half of 2023, the Ifo forecast is optimistic that with an increase in wage payments following the conclusion of new collective agreements, “real household incomes are likely to rise again from the middle of the year”.

That will stimulate the consumer economy.

The industry, in turn, will gradually work off the high order backlog and slowly expand production.

However, the Ifo assumes that the supply bottlenecks will gradually ease and that gas will not have to be rationed this winter.

Ifo expects economic recovery in 2024

“In 2024, the economy will gradually normalize again.

Economic output is likely to increase by 1.8 percent and the inflation rate to fall to 2.5 percent,” forecasts the Ifo.