Joint Economic Forecast for the German Economy #1-2023 – Inflation High at Core – Strengthen Supply Forces Now

The economic setback in the winter half-year 2022-23 is likely to have been less severe than feared in the fall. The supply-side disruptions which have been weighing on the German economy for some time have eased. However, a noticeable decline in inflation rates will be some time coming, as the demand pull is unlikely to diminish for the time being. In addition to the government relief measures, this will also be due to the foreseeably high wage increases. At 6.0 percent, the inflation rate in 2023 will be only slightly lower than in the previous year. The rate is not expected to fall noticeably until next year, in particular due to declining energy prices. The decline in the core inflation rate (i.e. the increase in consumer prices excluding energy) will initially be much weaker. It is expected to fall only slowly from 6.2 percent in the current year to 3.3 percent in the coming year. The manufacturing sector will become the mainstay of the economy in the coming quarters, benefitting directly from the easing of supply bottlenecks and the return of somewhat cheaper energy. As real wages pick up again, private consumption will also contribute to overall economic expansion in the further course of the year. By contrast, the construction industry will slow the economy, as demand will remain weak, also as a result of higher financing costs. Price-adjusted GDP will increase by 0.3 percent this year and by 1.5 percent next year. The institutes have thus raised their forecast from fall 2022 for the current year by a noticeable 0.7 percentage points, while the forecast for the coming year has been lowered by 0.4 percentage points. In recent years, economic policymakers have largely let the reins of supply-side policy slip, even in times when there was no acute crisis management. The need for reform is all the greater now, especially to meet the challenges of demographic change and the energy transition. Both require measures to strengthen potential, also in order to contain the intensifying conflicts over distribution.