Insight Investment

Part 1: Perspectives for the German economy – The IFO institute’s outlook

In this outlook, the ifo Institute looks at how the crisis is affecting the business climate in Germany and why Germany industry is particularly affected by rising gas prices.

The current economic backdrop

• Corporates remain pessimistic
  In 2022, the ifo Business Climate Index fell sharply, similar to the move seen at the beginning of the corona pandemic. However, unlike in March 2020, the current business development and business expectations components have diverged significantly: This suggests that the current business environment is better than during the pandemic, but that businesses are deeply pessimistic about the future.

Figure 1: ifo German business climate index, seasonally adjusted

Manufacturing industry, service sector, trade and construction. Source: ifo Business Survey, November 2022.

A mild recession seems unavoidable

In this volatile environment, forecasts are difficult, but a mild recession seems unavoidable. 

Inflation and monetary policy

• Inflation is unlikely to peak until mid-2023, and longer-term inflation risks are growing
  
  

Energy crisis and Germany as an industrial location

• The gap between German and US energy costs is a serious problem that will impact industry for years ahead
• German industry is particularly impacted given its high gas intensity

Part 2: Expert analysis

In the second part of the paper, we call upon three experts to analyse Germany’s energy strategy and the dangers of tighter monetary policy in the eurozone. They also explain how Germany and Europe can get out of the crisis.