The impact of Germany’s dependency can be seen in the most recent business climate surveys, and it comes in addition to the difficulties arising from Germany’s higher exposure to manufacturing, which was already suffering from supply-chain problems before the war in Ukraine broke out. In particular, the ifo index fell sharply in March, to the extent that the “business cycle clock” now shows the economy nearing recession because of deteriorating business expectations (figure 2).
It is possible that this large decline in the business climate indicator is sending an excessively pessimistic signal. Reassuringly, the labour market is unaffected so far, with recruitment remaining difficult and hiring intentions robust. Germany’s fiscal policy also provides significant protection against the impact of the war. The 22% increase in Germany’s minimum wage – to EUR 12 per hour from 1 October this year – will arrive late relative to the current inflationary shock, but will still cushion the blow to households’ real incomes caused by higher prices.
The recession risk is higher in Germany than in France, for example, because of Germany’s aforementioned greater dependency and because its economy already contracted in Q4 2021 (-0.3% q/q). However, if a recession happens, it may only be a “technical” one, i.e. two or three consecutive quarters of falling GDP, and not a prolonged one. This is the best that can be hoped for at the moment, but the risk should be monitored carefully.
Another negative for Germany is that its Q4 2021 growth carry-over (1.1%) is much lower than that of France (2.4%), Italy (2.3%) or Spain (3.2%), which will automatically drag down Germany’s average annual growth in 2022. Overall, we expect Germany’s economy to grow by around 2% this year, whereas growth should be close to 3% in France and Italy and around 5% in Spain. By comparison, our forecast for Germany is lower than the ifo’s baseline scenario (3.1%) but similar to the ifo’s alternative scenario (2.2%) and that of the German government’s panel of “wise men” (1.8%). However, large carry over effects mean that the various economies’ growth figures are less comparable than usual, including for 2023 when growth should strengthen in Germany (3.4%) and exceed that of the other three countries, where it is likely to continue falling to 2-3% according to our forecasts.
