REGIONAL REPORT
Surging energy costs are reducing the current account surplus and feeding into to broad-based price pressures , with inflation expected to average 7.7 per cent in 2022 and 4.8 per cent in 2023 ,” commented the IMF in July 2022 .
It warned then that , over the medium term , a fragmentation of global economic supply chains related to the war could compound longstanding challenges related to decarbonisation , population ageing , infrastructure gaps and digitalisation .
To secure energy supplies , the German government started diversifying away from Russian oil , coal and gas , establishing facilities to re-gasify liquified natural gas and requiring operators to fill gas storage tanks before winter 2022 . In response to surging energy prices , it also expanded income support for vulnerable households , cutting fuel taxes and providing liquidity support to firms .
IMF directors welcomed the authorities ’ ambitious decarbonisation plans and their digitalisation and transportation infrastructure push . They encouraged the authorities to continue investing in Germany ’ s growth potential and resilience through further enhancing energy security ; digitalisation ; innovation ; labour supply and training ; and social protection .
“ Improving economic opportunities for women and migrants will also be important . Boosting green public investment is vital to tackle network externalities and crowd-in private investments in clean technologies , which can also help lower Germany ’ s large external imbalances ,” it commented in July last year .
The OECD confirmed in November 2022 that German households and small firms had managed to reduce gas consumption by 31 % due to high prices and relatively warm weather in October . Electricity production using gas had been reduced and replaced by phasedout or reserve coal power plants which have been reactivated . Germany ’ s three remaining nuclear power plants , which were scheduled to close on 1 January 2023 , will continue operating until mid-April 2023 .
“ For 2023 , electricity price support will amount to 43 billion euros and will be partly financed by a windfall tax on electricity producers . The energy support fund will finance gas price support for households and firms up to a total of 40 billion euros in 2023 as well as liquidity support , equity injections and grants for firms ,” confirmed the OECD .
“ The electricity and gas price support will subsidise around 80 % of past average consumption through transfers , limiting consumer price increases in 2023 to about a doubling from 2022 prices , and maintaining market prices for any consumption exceeding 80 % of past average consumption . Energy price support measures are planned to be phased out in April 2024 ,” it added .
Challenges and opportunities
Germany ’ s recovery this year is being hampered by the fallout from the war in Ukraine and high energy prices .
Following Russia ’ s invasion of Ukraine , Germany ’ s GDP growth slowed to 0.1 % ( seasonally adjusted quarterly rate ) in the second quarter of 2022 and 0.3 % in the third quarter .
For 2023 , electricity price support will amount to 43 billion euros and will be partly financed by a windfall tax on electricity producers
“ High inflation and plummeting consumer confidence have limited the rebound of private consumption that had been imparted by the lifting of pandemic containment measures and high excess savings . Heightened uncertainty , high energy prices and material shortages have hurt manufacturing and construction , as well as investment ,” commented the OECD .
Business confidence plunged in September 2022 but stabilised in October 2022 . High order backlogs and easing supply chain bottlenecks are supporting exports . Annual consumer price inflation rose to 10.9 % in September 2022 with the phase-out of fuel and public transport subsidies and continued to rise to 11.6 % in October 2022 . Producer prices rose by 45.8 % over the year to September .
“ The labour market remains robust amid intensifying labour shortages , but annual negotiated pay rose only by 2.9 % in the second quarter of 2022 , resulting in a real wage decrease of 4.4 %,” commented the OECD in November 2022 .
“ High energy prices will weigh on energy-intensive industries , but exports should continue to recover due to a substantial order backlog and easing supply chain bottlenecks . Inflation will stay high due to the pass-through of energy and producer prices to consumers , the depreciation of the euro and rising wage pressures , but gradually moderate over the projection period ,” it added .
The energy crisis will also boost inflation .
“ As a result , real disposable income and household consumption will fall until mid-2023 . High energy costs will weigh on production , especially in energy-intensive industries . This will dampen exports . In addition , overseas demand will wane . The elevated level of uncertainty and higher financing costs will depress investment amongst enterprises and in housing construction . Real government consumption will decline as pandemic-related spending comes to an end ,” projected the German Bundesbank in December 2022 .
However , it believes that , from the second half of 2023 onwards , the German economy will gradually recover .
“ This is because overseas demand is expected to rise ; uncertainty will abate ; price pressures from energy commodities will diminish and the rate of inflation will fall . As the labour market will remain robust and wages will see strong growth , real household income and private consumption will increase again ,” it advised .
Machinery exports
Germany ’ s exporting machinery and equipment manufacturers have held up well in a difficult global environment , commented the VDMA ( representing machinery / equipment manufacturing industry in Germany and Europe ) in February 2023 .