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German economy: Ukraine war follows the Corona crisis

The lockdowns in Shanghai and Beijing show once again that the corona pandemic is not over and is still having an impact on the global economy – logistics processes remain disrupted and a new wave of illnesses next autumn and winter cannot be ruled out.

Nevertheless, at the turn of the year 2021/22, economic researchers and companies in Germany were quite confident that the economy would recover in the course of this year. Then came the Russian attack on Ukraine. Since then, other supply chains have been interrupted and raw materials and other inputs for industry are becoming scarce. This also hits this economic sector at a time when the losses from the two previous years are far from being made up for (chart):

On average in the first quarter of 2022, the production level in German industry was still 4 percent below the level at the end of 2019, the last quarter before the pandemic began.

In the automotive industry, which was already particularly battered, things have been going down again since the outbreak of war, where the production volume recently missed the pre-corona level by 27 percent.

In addition, aggravated resource shortages and logistical problems have pushed up prices – especially those for energy goods (see “The ECB’s monetary policy faces a dilemma”), which in turn is weakening consumers’ purchasing power.

Against this background, the current economic forecast by the German Economic Institute is cautious (chart):

The real gross domestic product will increase by around 1 ¾ percent this year, for 2023 the IW is forecasting an increase of 2 ¾ percent.

Change in key economic indicators compared to the previous year in percent

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Among other things, these forecasts are subject to the proviso that Russia does not completely stop its natural gas supplies to Europe, which have been curtailed anyway (see “An embargo on Russian gas is difficult to model”). The forecast scenario in detail:

foreign trade. The consequences of the pandemic and war are having a negative impact on the economy in many countries. In addition, parts of the demand for German export goods cannot be met due to the logistics problems. These and other factors prevent the export economy from continuing the strong upward trend of the past year:

In 2022, real German exports will only exceed the previous year’s level by around 3 ¼ percent.

As long as the world economy does not come under pressure for a longer period of time due to the effects of the Ukraine war, exports are likely to increase more strongly again in the coming year at 5¼ percent.

Consumption. The most recent inflation rates of more than 7 percent are spoiling the buying mood of German citizens:

This year, real consumer spending by private households will only exceed the level of 2021 by a good 1 ¾ percent.

It is true that consumers have saved a lot of money in the course of the corona-related restrictions. But there is great uncertainty about how the global political situation, inflation and the pandemic will develop, so that many people are holding back on consumption.

investments. Uncertainties and delivery bottlenecks are also affecting investment prospects. However, after two years of Corona, companies have a lot of catching up to do, so that according to the IW economic survey, a relative majority expects an increase in investments for 2022 (see “Ukraine war dampens companies’ expectations”). The IW forecast fits into this picture:

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Real investment in equipment will grow by around 4 percent in 2022. If the framework conditions do not deteriorate again, an increase of 8 percent can even be expected for 2023.

On the other hand, construction activity, which has been a pillar of growth for several years, is not only slowed down by material shortages and rising prices, but also by numerous shortages of skilled workers (see “We are now an economic question mark”). As a result, construction investments in the current year are likely to be just under 1 percent above the 2021 level.

Labour market. The Corona crisis has largely been overcome here. In January 2022, the number of unemployed fell back to the pre-crisis level, and at the beginning of the year the number of people in employment was even more than 200,000 higher than in 2019. And at least so far, the Ukraine war has apparently hardly curbed the demand for labor from companies:

At almost 45.5 million, the average number of employed people in 2022 is expected to exceed the previous year’s figure by 1¼ percent.

Unemployment is falling accordingly, but the increased proportion of long-term unemployed as a result of the pandemic is preventing an even faster recovery.

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