2023 Germany Outlook
Germany is one of the largest economies in the world and the largest in Europe. The country’s economic performance is closely watched by analysts, investors, and policymakers around the world. After a challenging year in 2022, Germany’s economic outlook for 2023 is cautiously optimistic.
2022 started with the new German government, consisting of the coalition of the left-leaning SPD, the Greens and the more liberal FDP, having taken office a short time before. This new government was immediately tested by several factors, the foremost of which was the Russian invasion of Ukraine. The government proved surprisingly flexible, with even the Green party accepting sending weapons to the Ukraine, lengthening the time that atomic power plants run, quickly building an LNG terminal etc. The country’s economic growth slowed, with GDP growth projected to be around 1.5% for the year. Despite these challenges, the German economy remained relatively stable due to its strong export-oriented industrial base.
The OECD (Organization for Economic Cooperation and Development, an organization of industrialized nations) predicts a more severe recession in Germany than five economic experts reporting to the government are forecasting. The OECD predicts that the gross domestic product will shrink by 0.5 percent in the coming year. However, In their annual report to the German government, the five economic experts forecast a decline of only minus 0.2 percent. Other economists are expecting slightly positive growth, however. Last year saw the economy grow by 1.9%.
“High volatility in energy prices and difficult energy supply are unsettling businesses and households,” Nicola Brandt, who heads the OECD Berlin Centre, told Reuters news agency. “High inflation is causing real incomes to fall, which is affecting consumption.” With its strong focus on industrial exports, she said Germany faces particular risks due to its pronounced dependence on gas supplies from Russia and disrupted supply chains.
However, there are also signs of hope. The high level of investment required in connection with the relocation of supply chains and the expansion of renewable energies is having a stabilizing effect. Exports are also likely to recover because of a substantial order backlog and easing bottlenecks in supply chains.
Inflation is expected to remain high due to the pass-through of energy and producer prices to consumers, the depreciation of the euro, and rising wage pressures. This year has already seen several strikes by unions, with wage increase demands in the range of 10%.
Energy remains a central concern for Germany. While Germany has managed to avoid serious energy problems in the winter of 2022/2023, it is not out of the woods yet. Russia supplied over 30% of German gas needs before the war. Therefore, the risk of gas rationing over the next two winters remains if the planned fiscal support measures need to be revised for gas savings.
The sharply higher interest rates have affected the German economy, particularly the building sector. House prices are starting to come down, which is highly unusual in the traditionally very stable German housing market. Buyers for houses have seen tightening bank lending requirements and significantly higher costs. Additionally, the government is implementing measures to make housing more energy efficient, adding a further significant cost burden on landlords. All of this serves to dampen the housing market, which has seen only one direction in prices over the last ten years.
A growing challenge in Germany is the impending population decline. Germany is quickly aging. The population’s average age has risen from 43.9 in 2011 to 44.7 in 2021. This trend is reflected in a shortage of younger people entering apprenticeship training and taking on jobs. Although Germany has had a large influx of refugees, many are not trained and speak little or no German. Therefore, this population segment isn’t of much help. The aging population is an ongoing problem in Germany and will continue to affect the economy over the next several years.
Despite these challenges, several factors could support Germany’s economic growth in 2023. The country’s industrial sector is expected to continue to perform well, driven by solid demand from both domestic and international markets. Germany’s labor market is also likely to remain relatively strong, with low unemployment rates and high levels of skilled labor.
In addition, Germany’s government has announced several measures to support the country’s economic recovery, including increased investment in infrastructure and digitalization. These measures could help support growth and job creation in the coming years.
In conclusion, Germans are cautiously optimistic about the country’s economic outlook for 2023. While challenges remain, Germany’s strong industrial base and skilled labor force should help support growth in the coming years. Additionally, the government’s investment in infrastructure and digitalization could further boost the economy.