The German government has joined economists in warning that the energy crisis caused by Russia’s invasion of Ukraine will push Europe’s largest economy into recession next year.
The government on Wednesday slashed its growth forecasts for the next two years and now expects output to shrink by 0.4 per cent next year, following lukewarm growth of 1.4 per cent in 2022.
The new forecast is a sharp downgrade from Berlin’s previous prediction of growth of 2.2 per cent this year and 2.5 per cent next year.
Robert Habeck, the German vice-chancellor and economy minister, said the “substantial economic downturn” was “above all concentrated in the third and fourth quarters of this year and the first quarter of 2023”.
Soaring prices, shortages of energy and supply chain bottlenecks would cause German gross domestic product to contract in the next three quarters, before an expected rebound in 2024, with growth estimated at 2.4 per cent.
Russia’s decision to cut gas supplies to Europe after its invasion of Ukraine has plunged Germany into its worst energy crisis since the second world war. Soaring gas prices have forced many companies to reduce production or even shut down, while households are bracing themselves for much higher heating bills.
Habeck said: “We mustn’t let [Russian president Vladimir] Putin win with his strategy of endangering our economic prosperity.”
The expected downturn “could have been worse if the government hadn’t acted” by providing almost €300bn to cushion the blow of higher energy prices. He said the many relief measures “had succeeded in stabilising the economy”.
“If you recall, economists at the start of the year said that if Russia stopped supplying gas then the economy would shrink by 3 to 9 per cent,” Habeck added. “The measures we’ve taken . . . have gained us time, and they’ve worked.”
Last month, chancellor Olaf Scholz announced a €200bn “protective shield”, financed by new borrowing, to soften the effects of the energy crisis, following the unveiling of a €100bn package earlier in the year. Under his plans, the state will cap the cost of gas for private households and industrial companies through a “gas price brake”.
Economists have predicted the cap will lower inflation and boost growth in the short term but could mean prices keep rising rapidly for longer, which is likely to put more pressure on the European Central Bank to lift interest rates.
ECB president Christine Lagarde told an Institute of International Finance event in Washington on Wednesday that if fiscal policy and monetary policy were not co-ordinated, it would have to be “even more determined and more decisive in its fight against inflation”.
Habeck forecast German inflation would average 8 per cent over the whole of this year and 7 per cent next year — far above the ECB’s 2 per cent target. He predicted German inflation would fall to 2.4 per cent in 2024.
Consumer prices in Germany rose 10.9 per cent in the year to September, the fastest pace for 71 years, eroding the purchasing power of households and increasing the pressure on the ECB to continue raising interest rates aggressively.
The government’s forecasts are slightly more pessimistic than those released by the IMF this week, which predicted German GDP would grow 1.5 per cent this year before shrinking 0.3 per cent next year — the worst performance of any large economy except Russia.
Asked why Germany is expected to do worse than others, Habeck blamed the country’s high dependence on Russian gas. “Countries whose economic strength is founded on Russian gas supplies are now experiencing a particular problem,” he said.
Berlin’s new forecasts are in line with those issued by the country’s leading economic institutes two weeks ago. The institutes also warned the German economy could shrink by 7.9 per cent next year in the event of an unusually cold winter and the introduction of gas rationing in industry.
Habeck said: “We have taken good precautions and strengthen this every day.” German gas storage facilities had been filled to almost 95 per cent of their capacity, he added, while warning: “Gas is a scarce commodity and we need to use it sparingly in order to get through the winter well.”
