According to the Ifo Institute’s new economic forecast, the battered German economy is about to have a respite thanks to high government spending and the hoped-for end to the war in Iran. However, there is a risk of another fall into stagnation by the end of the decade unless the federal government initiates reforms. For this year, the Munich economists have slightly raised their growth forecast to 0.8 percent. The German gross domestic product could also increase by 0.8 percent next year.
However, according to both the Bundesbank and the Ifo, the aftereffects of the war-related energy price shock will be felt for a longer period of time: the Bundesbank expects inflation to rise to over three percent in the next few months. The Ifo Institute expects inflation to rise by 2.9 percent for the year as a whole and also expects a comparatively high 2.7 percent next year.
Ifo boss Fuest: With persistently high government spending, massive increases in taxes and duties are inevitable
To a considerable extent, the expected growth this year and next is due to the debt-financed high government spending on infrastructure and defense, as Ifo expert Timo Wollmershäuser said. “However, this fiscal boost comes at a price.” The institute expects the national debt ratio to rise from currently 63 to 68 percent of gross domestic product.
Ifo President Clemens Fuest said: “And if nothing happens, it will continue like this for the next few years. And that necessarily means that taxes and duties will also rise massively.” This in turn will reduce economic growth.
Medium-term prospects bleak
“So we currently have increasing government spending, stagnating economic performance and falling private investment.” Accordingly, the two scientists assume that the potential growth of the German economy will fall to a “historically low 0.1 percent” by the end of the decade, said Wollmershäuser.
Bundesbank: End of the fuel discount will make energy more expensive again
Although the end of the war in the Persian Gulf is within reach with the signing of the framework agreement by the USA and Iran, the Bundesbank believes that the inflation rate in Germany will not suddenly decline. “After the temporary fuel discount expires, energy inflation is likely to initially be higher again,” says the monthly report for June.
Domino effect also on food prices
“In the case of gas, the higher wholesale prices will probably only reach private households with a delay due to longer-term procurement and contract structures,” writes the Bundesbank in its monthly report. Food could also become more expensive because producers add higher energy costs to prices. The reduction in energy tax on petrol and diesel of almost 17 cents per liter, which has been in effect since May 1, expires at the end of June.
However, Ifo economic researcher Wollmershäuser sees at least the possibility that energy prices could fall again more quickly. “The markets are now assuming that next year we will be almost back to where we actually were before the outbreak of the war,” said the economist, referring to the price development of the past few days. “If that actually happens, then I think the inflation rate will fall again relatively quickly.”