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German economy will first pick up speed in 2022

Press Release of September 16, 2021

DIW Berlin forecasting experts are lowering their forecast for 2021 from 3.2 to 2.1 percent - Supply bottlenecks and material shortages are weighing on German industry - Private consumption remains restrained - With growth of just under five percent, the German economy will pick up speed in 2022 once bottlenecks have been overcome and infection rates have fallen on a sustained basis - Inflation no cause for concern

The global economy is booming, with advanced economies in particular experiencing growth as vaccination rates rise. The German economy, however, is stuttering. Global bottlenecks in intermediary goods are preventing domestic industry from gaining momentum despite strong domestic and foreign demand. Accordingly, exports have also lost momentum and are stagnating for the time being. After benefiting from the low incidence rates over the summer, service providers are likely to experience renewed setbacks in winter 2021/22 due to rising case numbers. However, experts assume that higher case numbers will not lead to strict containment measures as in winter 2020/21, as the vaccination strategy is working.

If the production backlog gradually clears around the end of 2021, German industry should take off in the first quarter of 2022. Moreover, if the pandemic is increasingly overcome from spring 2022 onward, as assumed, the beleaguered service providers will return to their recovery path and consumption will contribute significantly to economic output. Accordingly, DIW Berlin forecasting experts have increased their forecast for 2022 to 4.9 percent.

© DIW Berlin

Temporarily high inflation no reason for concern

The labor market is also slowly picking up again, with employment likely to expand noticeably in the third quarter of 2021. However, the fourth wave of the coronavirus will likely slow things down again slightly and temporarily push up the number of short-time workers. In the meantime, positive signals are coming from industry once again: more jobs subject to social security contributions are likely to be created. The number of employed persons is expected to rise sustainably beginning in spring 2022.

In 2022, wages should gradually return to the wage dynamic of the pre-crisis years. That they are not increasing exuberantly is one reason the recent rise in inflation does not worry researchers. The currently high inflation rate is primarily due to non-recurring effects: To a large extent, it can be attributed to oil prices, which have skyrocketed back into a normal range, and the expiry of the VAT cut. Both factors will distort the rate increasingly less in 2022, which is why inflation is likely to fall to two percent and below from then.

Debt ratio rises to over 70 percent

The coronavirus containment measures resulted in weaker tax revenue growth and substantial additional expenditure in the first half of 2021. General government revenue is expected to increase by 3.3 percent in 2021 and by as much as 4.7 and 4.6 percent in 2022 and 2023, respectively, as a result of the economic catch-up process. However, spending also continues to rise. Overall, it is likely to increase by another four percent in 2021, leading to a general government financing deficit of around 160 billion euros. A significant deficit in the amount of 78 and 43 billion euros is expected for 2022 and 2023, respectively. The debt ratio is likely to increase from 69 to 72 percent in 2021 before again decreasing to under 70 percent in 2022. As a result, it is unlikely that the debt brake will be adhered to in 2023.

In brief

Marcel Fratzscher, DIW Berlin President: “Economic policy in Germany is at a decisive turning point. In the coming years, Germany will require massive public and private investments for the future to be able to achieve climate change, digitalization, and competition targets. The new federal government will also not be able to adhere to the debt brake in 2023. It must decide: Does it want to make investments in the future or short-term tax cuts and debt reduction its top priority?”

Simon Junker, forecasting expert at DIW Berlin: “Inflation will easily pass four percent by the end of 2021. While this initially appears alarming, the situation will calm by the end of 2021 with the end of the VAT effect and the rate will cool abruptly by one percentage point. Over the further course, as crude oil prices settle, inflation will lose a good further percentage point of momentum.”

Marius Clemens, fiscal policy expert at DIW Berlin: “Significant general government deficits are expected in the coming years. Thus, the new coalition will be faced with conflicting goals: adhering with the debt brake and thus saving and repaying, or modifying the debt brake to push ahead with necessary modernization measures. This applies to public investment expenditure as well as to tax incentives for private investment on the revenue side, for example through changes in depreciation rules.”

Geraldine Dany-Knedlik, global economy expert at DIW Berlin: “Globally, the pandemic has recently calmed, making it likely the global economy will return to its recovery path in the third quarter of 2021. Due to increasing immunity among the population, the economy is expected to be far less burdened in winter 2021/22 than previously. Powerful gains in private consumption are proving to drive growth and disruptions in international supply chains are expected to ease in 2022. We are assuming growth of 6.7 percent for 2021 and 5.2 percent in 2022.”

Geraldine Dany-Knedlik

Head of Forecasting Department in the Macroeconomics Department