ECONOMY

Economists slash German growth forecast as supply problems hit

Germany’s top economic research institutes have cut their growth forecasts for Europe’s largest economy this year to 2.4 from 3.7 per cent, blaming supply bottlenecks in manufacturing and the lingering impact of the pandemic on services.

The lower forecasts — published twice a year on behalf of the government — reflect a worsening short-term outlook for the German economy, as supply chain problems have continued for longer than many economists expected.

Oliver Holtemöller, head of macroeconomics at the Halle Institute for Economic Research, said the economy had rebounded strongly earlier this year — but not as much as expected “and that was because of supply bottlenecks in the manufacturing sector”. 

“Production has actually been falling there since the start of the year and the effects of the pandemic . . . as well as the supply bottlenecks will slow down the recovery over the winter months,” he told a Berlin press conference.

German industrial production fell 4.1 per cent in August, taking it 9 per cent below pre-pandemic levels. Several of Germany’s big carmakers have had to idle production due to shortages of materials, particularly semiconductors.

However, the five research institutes raised their forecasts for next year to 4.8 from 3.9 per cent, after which they predicted growth would slow to 1.9 per cent in 2023.

The outlook is in line with most economists’ models but more pessimistic than one published this week by the IMF, which lowered its prediction for German growth this year to 3.1 from 3.6 per cent and raised its forecast for next year to 4.6 per cent.

“We assume that the supply bottlenecks will only be resolved gradually, in the course of next year,” said Holtemöller. “The main driver of the recovery next year will be private consumption. This will pick up significantly.”

He said confidence in next year’s rebound was bolstered by the strength of Germany’s labour market, after the country added 240,000 jobs in the three months to September. “We see that companies are hiring a lot,” he added.

The five institutes predicted Germany would add a further 450,000 jobs next year and a similar amount in 2023, pushing its unemployment rate close to pre-pandemic levels.

But they predicted growth in unit labour costs would drop from 3.4 per cent last year to 0.8 per cent this year and zero in 2023 — dismissing fears that rising inflation could trigger a surge in wages.

Holtemöller said German inflation would return to around 2 per cent from 2023. “We are not seeing any signals at the moment . . . that we could get a significantly above-average inflation rate over the long run.”

That is despite higher inflation forecasts both for this year, which were raised to 3 per cent from 2.4 per cent, and for next year, to 2.5 from 1.7 per cent — reflecting expectations that higher energy prices and production costs will pressure prices.

Oliver Rakau, chief German economist at Oxford Economics, said the expectation that inflation will fade in Europe’s largest economy, even though it has one of the eurozone’s lowest unemployment rates, strengthened the European Central Bank’s case that the recent surge in inflation above its 2 per cent target is only “transitory”. 

Germany’s political parties are still negotiating to form a ruling coalition after last month’s election. But the institutes predicted the country would soon return to fiscal discipline, with its budget deficit falling from 4.9 per cent of gross domestic product this year to 2.1 per cent next year and 0.9 per cent in 2023.

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