Impact of High Energy Prices on Germany’s Potential Output

Selected Issues Papers, July 24, 2023

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Impact of High Energy Prices on Germany’s Potential Output

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Bibliographic details

• Authors: Yushu Chen, Ting Lan, Aiko Mineshima, Jing Zhou
• Published: July 24, 2023
• Series: Selected Issues Papers
• DOI: https://doi.org/10.5089/9798400248603.018

Summary and key findings

• The surge in energy prices since Russia’s invasion of Ukraine has reduced the energy-intensive sector’s production in Germany.
• The non-energy intensive sector’s production has held up, owing in part to firms’ efforts to improve energy efficiency.
• Energy prices are expected to remain elevated in the foreseeable future, compared to pre-war levels, adversely affecting firms’ productivity and thus lowering Germany’s potential output.
• Economic modeling suggests that this effect could be around 1¼ percent of GDP in staff’s baseline, with some uncertainty around this estimate depending on the ultimate magnitude of the energy price shock and the degree to which increased energy efficiency can mitigate it.

Modeling, scenarios, and uncertainties

• Baseline projection: effect on potential output of around 1¼ percent of GDP (staff’s baseline).
• Uncertainty factors explicitly highlighted:
  • The ultimate magnitude of the energy price shock.
  • The degree to which increased energy efficiency can mitigate the adverse productivity effects.

Policy implications and recommendations

• Policies can promote effective adjustment to the shock by:
  • Increasing productivity.
  • Maintaining strong price incentives to conserve energy.
  • Encouraging investment in renewable energy production.
• Emphasis on preserving price signals to foster energy conservation and renewable investment while supporting productivity-enhancing adjustments.

Subject areas and keywords (as listed)

• Subject: Energy conservation; Energy prices; Environment; Fuel prices; International organization; Monetary policy; Potential output; Prices; Production; Productivity.
• Keywords: directed technical change; effect favor; Energy conservation; energy efficiency; energy efficiency response; energy prices; Fuel prices; Germany; Global; optimization problem; potential growth; potential output; price effect; price signal; productivity; surge in energy price.

Source: "Impact of High Energy Prices on Germany’s Potential Output", Selected Issues Papers, July 24, 2023.

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