The winter was mild and energy consumption lower than many feared. Instead of the expected recession, a small economic growth of 0.3% is predicted. “The economic downturn during the last winter semester is likely to be less severe than was estimated in the autumn,” explains Timo Vollmershäuser, a professor at the Ifo Institute for Economic Research at the University of Munich.

The Ifo Institute belongs to the group of four leading German economic research institutes that produce a report twice a year on behalf of the German government, and this year a research institute from Austria also participates. The figures each calculates are important for estimating tax revenue and budgeting for the federal government.

The German economy suffered only limited damage

Although the companies’ order books were full, general conditions were not favorable. “Persistent supply difficulties, sharp energy price increases, as well as labor shortages, also due to extremely high sickness rates, have reduced the productive potential of the German economy and prevented a stronger increase in the domestic product,” says Vollmershäuser.

For 2024, the institutes expect a growth of 1.5%. Of course, this is not certain, because geopolitical tensions and cold temperatures could cause prices to jump again at any time. “The risk of shortages next winter still exists,” Vollmershäuser points out, while regarding the medium-term prospects he emphasizes that “according to our estimates, the average growth rate of the German economy will only be around 0.5% towards the end of the decade ».

The end of development

All this shows that the fat cow seasons in Germany are over, according to the forecasts. The causes lie less in the consequences of the pandemic and the war in Ukraine and more in the aging of society, the very small number of workers and, above all, the shift away from natural gas, oil and coal, which initially leads to higher energy prices .

Cheap fossil energy has been the basis for the successful German business model. Now everything is different. Russian natural gas has been replaced by expensive supplies and at the same time it has been realized that a rapid transition to climate-friendly forms of energy is now necessary.

Stefan Koetz, a professor at the Kiel Institute for the World Economy, uses an understandable figure of speech: “The growth prospects of the German economy can be compared to the speed of a carriage, where the number of draft animals decreases, as does their food, but at the same time more passengers want to travel with her.”

In the present situation, it is important to “grease the wheels and get rid of the burden.” This could be done, for example, by reducing “the high tax burden” or through the migration of skilled workers, Coates explains. Government stimulus programs, on the other hand, would not help, but would be – to put it mildly – ​​“nothing more than a whip”, providing only a short-term boost.

Subsidies only slow down

Scientists consider the talk of reducing the cost of industrial electricity wrong. Although the security and cost of energy supply are important factors, the energy transition cannot be achieved without a controlling ‘price mechanism’. “Achieving the climate goals requires huge efforts in energy efficiency, and the experience of the past year has shown that the price of energy can be a really suitable instrument to increase this efficiency,” says Vollmershäuser.

Economists clearly reject the political promise that restructuring the economy towards climate neutrality will provide an additional economic boost. The productive capacities of the economy will be restructured. “There is no double dividend – greater climate protection and a development miracle. Unfortunately, this is an illusion,” comments Coates.

Prices remain high

Thus, the improvement of other conditions becomes very important, including in particular the reduction of inflation. The institutes expect the situation to improve only from next year, when inflation will also ease to 2.4%, boosting private consumption from the second half of the year onwards, when real wages will rise again.

The institutes see industry as a pillar of the economy, which will benefit from easing supply problems and cheaper energy. The construction industry, on the other hand, will slow down. “Demand will remain weak, especially in residential construction, due to the fact that, in addition, E.K.T. will further tighten its monetary policy and thus funding costs will continue to rise,” says Volmerscheuser.

Favorable times for employees

Institutes have good news for the job market. The number of people employed is expected to increase further next year, to around 46 million. However, the number of unemployed is likely to rise temporarily to almost 2.5 million this year, as Ukrainian refugees will not be able to enter the labor market directly. In 2024, unemployment will drop again to 2.4 million.

Times will be favorable for workers, as they are likely to have the upper hand in collective bargaining in the coming years. “So we may see significant wage increases,” says Coates. In times of skilled worker shortages and demographic changes, companies must “be much more responsive to the desires of the workforce in order to remain attractive.”

Banks as a risk factor

The global economy is described in the spring report as “still weak”. The “historically unusual” rise in interest rates, which will continue for the foreseeable future, has a significant dampening effect on investment. A risk to the global economy today comes primarily from the financial sector. “Rises in interest rates cause asset prices to fall, and if banks do not adequately compensate for this change, a lack of confidence may increase.”