Germany Faces Weaker Growth Amid Energy Concerns

IMF News, July 22, 2022

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Growth in 2021: 2.9 percent.
IMF projection for 2022: 1.2 percent, reflecting elevated energy import prices and weak consumer confidence.
IMF projection for 2023: 0.8 percent, reflecting persistent supply bottlenecks and delayed pass through of wholesale to retail gas prices.
These growth rates for 2022 and 2023 are, respectively, 0.9 and 1.9 percentage points below those projected in April’s World Economic Outlook.
Projections account for ongoing fiscal support, including:
- expansion of short-time work benefits (Kurzarbeit),
- extension of pandemic-era grants to firms,
- 1.2 percent of GDP in new spending on defense, climate, refugees and measures to help households cope with higher energy prices.
Uncertainty is described as very high; the greatest threat is a persistent and full cutoff of Russia’s gas exports to Germany and Europe.

Consumer price inflation reached 8.3 percent in June.
About three-fifths of inflation so far has come from energy prices.
IMF expectation for inflation: average 7.7 percent in 2022, moderating to 4.8 percent in 2023 as energy prices stabilize.
Inflation expectations five years into the future remain anchored near the European Central Bank’s target of 2 percent.
Hourly wages have risen by about 3.3 percent annually since the start of the pandemic—less than consumer prices and close to output prices.
The report notes that while a wage-price spiral cannot be ruled out, it does not seem likely given weakening growth prospects.

The report identifies a severe downside scenario: a persistent and full cutoff of Russia’s gas exports to Germany and Europe.
IMF analysis suggests this scenario could reduce German economic activity and raise inflation by sizable amounts.
In a severe downside scenario with gas shortages and spiking costs for gas consumers, the report indicates that postponing the return to the debt brake rule may be necessary to allow additional government borrowing to support the economy.

Actions already taken by the government to boost energy security include:
- financing floating terminals to import liquified natural gas,
- requiring operators to fill gas storage facilities,
- expanding the toolkit of emergency legal powers.
Further recommended measures to strengthen energy security:
- financial incentives to reduce gas consumption,
- intensified cooperation within the EU on emergency plans.
Opportunity identified: use the need to enhance energy security to build a cleaner economy less dependent on fossil fuels.
Recommended policy: a green public investment push to crowd in private investment in clean technologies like renewable power.

Fiscal policy should be flexible and ready to provide more support to vulnerable households if the situation deteriorates.
In severe downside outcomes, postponing the return to the debt brake rule may be necessary to take on additional borrowing.
Financial sector assessment:
- The financial sector has weathered the circumstances well so far, but there are pockets of vulnerability (especially in housing and energy markets).
- Bank profits have been low for many years.
- Policy guidance: monitor banks’ balance-sheet sensitivity to evolving risks and strengthen banks’ buffers as needed.

By the Germany Country Team, IMF European Department, July 22, 2022