ifo | “High inflation rates have driven the German economy into a winter recession.” This is how Timo Wollmershäuser, Head of Forecasts at ifo, responded when Germany’s Federal Statistical Office reported that economic output in the fourth quarter of 2022 had fallen by 0.2 percent. The Federal Statistical Office had originally expected growth to be flat, based on provisional figures. “The usual definition of a recession is when gross domestic product shrinks for two consecutive quarters. A further decline is highly likely in the current quarter, and this will probably be slightly steeper. This means that economic output will once again be lower than it was before the outbreak of the coronavirus pandemic in 2019,” Wollmershäuser says.
A surprisingly sharp increase in new car registrations at the end of the year is likely to be the reason why GDP in the final quarter of 2022 did not contract by even more. With government subsidies for plug-in hybrids and electric vehicles either expiring or being reduced on December 31, new registrations soared by 20 percent compared with the previous quarter. This on its own is likely to have expanded private consumption by around 0.8 percent, thus partially offsetting the decline in price-adjusted sales in retail and other consumer-related services.
“Given that many buyers brought their car purchases forward into last year, we ought to see a corresponding steep fall in automotive sales in the current quarter,” Wollmershäuser adds. Moreover, high inflation and rising interest rates will cause the remainder of consumer spending as well as construction output to fall further. By contrast, high order backlogs and easing bottlenecks for energy and intermediate products will boost industrial activity. Overall, economic output will likely contract by another 0.4 percent in the first quarter of 2023 and then stagnate in the second quarter. The economy is not expected to recover until later in the year, as inflation rates will fall appreciably and incomes will rise strongly. “This means that for 2023 as a whole, GDP is likely to remain only at the previous year’s level,” Wollmershäuser says.