Germany’s economy is expected to slide into a recession in 2023 due to its high exposure to the current energy crisis, according to GlobalData. As a result, the leading data and analytics company has downwardly revised its estimations for Germany’s economic growth predictions by -2.4 percentage points (pp) for 2022 and -1.7pp for 2023 since its last update in February 2022.

Recession imminent for Germany as country imports 35% of gas from Russia

According to GlobalData’s Country Analytics Overview, Germany’s economy will slow down from 2.9% in 2021 to 1.5% in 2022, before sliding into a recession (-0.3%) in 2023.

Puja Tiwari, Economic Research Analyst at GlobalData, comments: “Mounting energy prices and the diminishing purchasing power of citizens due to inflation will cause a slowdown in industrial production and push the German economy into a recession in 2023. Germany is particularly sensitive to movements in Russia’s gas prices, as natural gas makes up around 25% of Germany’s energy mix and the country imports 35% of this from Russia.”

Household expenditure to shrink impacting investment and luxury purchasing

In order to fund the higher procurement cost of imported gas and fill the country’s storage facilities, Germany imposed levies on gas consumers in August 2022. This will further escalate prices and cause real household consumption expenditure to shrink by 0.2% in 2023, according to GlobalData estimates.

Tiwari continues: “As prices continue to rise, Germans may defer investment plans and delay purchasing luxury items as they struggle to pay the higher prices of necessities. Price of food increased from 18.7% in September 2022 to 20.3% in October 2022.”

Inflation rate in Germany to stay at highs of 7.1% throughout Q1-Q3 2023

Key macroeconomic indicators point towards a slump in growth rate, with industrial production and exports contracting by an average annual rate of 2% and 0.1%, respectively, during March and July 2022. As a result, GlobalData forecasts that Germany’s real GDP will contract for three consecutive quarters, starting in Q1 2023 at an average annual rate of 0.9%. The inflation rate is also projected to stay at an elevated level, rising from 3.1% in 2021 to 8.2% in 2022, caused by global supply chain disruptions and energy crisis before settling to a high 7.1% during Q1 to Q3 of 2023.

Tiwari continues: “The German government has announced a stimulus package worth $100.4 billion (2.8% of GDP), as of September 2022, to mitigate the impact of global supply chain disruptions by helping businesses and households cope with their soaring energy bills. The country has also passed a law to bring back coal and oil-based power plants as a replacement of the gas shortages. However, the energy crisis stimulus package is expected to further burden government finances, which were already under pressure due to the COVID-19 response packages.”

Continued depreciation of the Euro-Dollar expected

Amid the crisis, the Euro area currency depreciated against the dollar to a two-decade low in August 2022. GlobalData forecasts that this depreciation will continue to 0.97 in 2022 and 0.99 in 2023.

Tiwari notes: “Continued depreciation of the Euro will make imports more expensive (including raw materials) and may profoundly impact the inflationary pressure in the coming years.”