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German economic institutes cut 2023 GDP forecast on energy price surge

·2-min read
FILE PHOTO: A German flag is reflected in the window of the Paul Loebe building in Berlin

BERLIN (Reuters) -Three of Germany's leading economic institutes lowered their forecast for Europe's largest economy next year, predicting high energy prices caused by the Ukraine war would take their toll.

The IfW institute in Kiel and Halle's IWH predicted on Thursday that the economy would contract in 2023, a U-turn from June forecasts that predicted growth of 3.3% and 2.0%, respectively.

The IfW said the economy would shrink by 0.7% while the IWH saw a more drastic contraction of 1.4%. The RWI institute lowered its 2023 forecast but still predicted growth, of 0.8%.

For the current year, IfW, IWH and RWI still expect the German economy to grow, but not as strongly as previously thought, with the forecasts ranging between 1.1% and 1.4%.

The most recent government forecast is for economic growth of 2.2% in 2022 and 2.5% in 2023.

"The German economy is in a downward spiral," the IfW economists summarized in their forecast.

Since private consumption accounts for a large part of economic output, the expected loss of purchasing power will have negative consequences for the economy, said the institutes.

The institutes, part of a group that advises the government, now predict that inflation will come in over 7% this year, well above the government forecast for an average of 6.1%.

For 2023, predictions vary, with RWI's inflation forecast on the low end, at 3.5%, while IWH tops the range with 9.5%.

The German government on Sunday unveiled plans to spend 65 billion euros ($65 billion) on shielding consumers and businesses from the effects of soaring inflation. The latest package brings to 95 billion euros the amount allocated to inflation-busting since the Ukraine war began.

($1 = 0.9999 euros)

(Reporting by Rene Wagner, Writing by Miranda Murray;Editing by Madeline Chambers, Andrew Cawthorne, Alexandra Hudson)