The economic outlook for 2023 is mixed at best. Most economic researchers are no longer assuming that there will be a sharp recession. However, the headwind is likely to persist at least in the coming months – and thus also shape the beginning of 2023.

“In terms of the economy, next year will be difficult,” Fritzi Köhler-Geib, chief economist at the state-owned KfW banking group, told DW. KfW has lowered its forecast.

She is now assuming a decline in economic activity of one percent in the coming year – after growth of 1.7 percent in 2022. In view of the multiple crisis situation, however, the upside and downside risks of the forecast are significantly greater than usual.

“Germany in recession” is also the headline of the current economic forecast from the Cologne Institute of German Economics. The high prices, an imminent gas shortage and the consequences of the Ukraine war weighed on both companies and consumers. How severe the crisis will be depends primarily on the further development of the energy crisis. Geopolitical dangers from Russia’s war in Ukraine also hung over everything.

It is already clear that the local economy is faced with huge losses in prosperity. “Unfortunately, things won’t get much better next year. For better or for worse, we will have to get used to the horrendous energy prices,” says IW boss Michael Hüther. Hüther and his colleagues assume an inflation rate of seven percent in 2023.

Energy prices are the main driver of the currently rampant inflation. But now it’s not just energy prices; food and other consumer goods are also becoming noticeably more expensive. This can be seen from the so-called core inflation, which excludes the often fluctuating energy and food prices.

For example, the economists at Deutsche Bank see inflation as “here to stay” in their outlook. “Due to declining gains from globalization, demographic pressures and a structurally more expansive fiscal policy, inflation is unlikely to drop to its pre-crisis level,” says Marc Schattenberg, economist at Deutsche Bank Research.

The Ifo Institute sees a dilemma here between government fiscal policy on the one hand and central bank monetary policy on the other. “Actually, when inflation is high, we need a more restrictive fiscal policy,” says Ifo President Clemens Fuest.

What is meant is the restriction of state aid such as the gas and electricity price brake. Because the financial relief contributes to more money in the households and thus increases inflationary tendencies. But this help is also necessary in Fuest’s opinion because there are vulnerable groups in the population and medium-sized companies also need help.

“On the other hand, monetary policy is contractionary.” This describes the course taken by the European Central Bank, which has raised the key interest rate in the euro zone to 2.5 percent in four big steps since the end of July. “It’s like pressing the gas pedal and the brake at the same time in a car: Then the car starts to lurch. This is the situation we are in at the moment.”

Nevertheless, the researchers in Munich expect a milder recession than previously assumed. For the coming year, the institute only predicts a mini economic downturn of 0.1 percent. “Gross domestic product will shrink in the two quarters of the winter half-year 2022/23, but then things will pick up again,” says Ifo economics chief Timo Wollmershäuser, explaining the economic trough and the forecast rise in the coming months.

The Munich economic researchers also see a little more relaxation than others when it comes to inflation. In 2023, consumer prices are likely to increase by 6.4 percent – also less than previously feared. Deutsche Bank is assuming 7.5 percent in the coming year. The aforementioned gas and electricity price brake, which will relieve consumers, contributes to the decline.

However, the burdens of inflation are still noticeable even with the aid. This slows down the willingness of households to consume. In the first half of 2022, consumption continued to support the economy. With high energy prices and inflation, low-income households have reached their limits. So they have to forgo consumption, which slows down the economy. The IW assumes that consumption will fall by one and a half percent in the coming year.

The headwind is also coming from other areas that had previously supported the economy. In the construction sector, for example, orders are falling and planned projects are being cancelled. According to surveys by the Ifo Institute, the business expectations of companies in the industry have fallen to their lowest level since the surveys began more than three decades ago.

The analysis by Creditreform, which has determined an increase in insolvencies for the first time since 2009, fits into this picture. “Persistent inflation, rising interest rates and energy costs as well as an increasingly tough competitive situation are affecting many companies,” says Patrik Ludwig Hantzsch, head of the economic research department at the credit agency.

The good news is that last year the number of insolvencies was at an all-time low. From this point of view, the increase is still moderate. Here, too, the government aid programs send their regards. The temporary suspension of the obligation to report insolvency to cushion the economic consequences of Corona also contributed to the low level of insolvencies.

In the coming months and in the coming year, the number of bankruptcies and insolvencies is likely to increase, albeit from a low level. But how much depends on the economic situation. Uncertainties characterize the turn of the year this winter. This is also reflected in the different economic and economic forecasts for the new year 2023.

Author: Mischa Ehrhardt

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The original of this article “Uncertain economic prospects for 2023” comes from Deutsche Welle.