2022

Volker Wieland, IMFS
Updated Economic Outlook of the German Council of Economic Experts (GCEE)

Video (Youtube)

In a completely changed situation since the publication of the annual report 2021/22, Prof. Volker Wieland presented the new economic outlook of the German Council of Economic Experts (GCEE) during an IMFS Policy Webinar on March 30, 2022. The focus was on the updated forecast in light of the sharp rise in energy prices and the Russian attack on Ukraine.

According to Wieland, in November the indicators still pointed to a robust global economy. "We had actually expected supply bottlenecks to decline, but supply costs are now already showing a significant increase again." He added that the drivers of inflation were manifold; in the euro area, the rise in inflation was largely due to energy prices. They had already risen significantly before the Ukraine war, but there were again sharp increases as a result of the attack. The economic outlook has deteriorated significantly as a result of the war. The Council of Economic Experts now expects GDP to grow by 1.8 percent in 2022 and by 3.6 percent in 2023, with recovery expected at best in the second half of the year. "So we are slipping even further behind the 2019 level," Wieland said. A supply freeze or embargo on Russian gas has not yet been taken into account in the forecasts, he added.

In terms of inflation, the GCEE expects the inflation rate to climb to 6.1 percent in 2022, and for 2023 the forecast is 3.4 percent - a massive upward revision. While this is driven considerably by energy prices as well as increased food prices, core inflation is also increasing significantly, he said.  "Core inflation is carrying inflation in the coming year, because wage increases are also coming," Wieland warned. Due to the labor shortage, there is pressure to increase or at least adjust wages.

The GCEE was keen not just to present a forecast, but to draw a very clear economic policy conclusion, Wieland said. "We must now pull out all the stops to prepare for the risk of significantly higher energy prices or a supply freeze or embargo." Natural gas prices in Europe and Asia had already risen significantly in 2021, he said. "If we try to replace Russian gas with LNG now, it will obviously be very expensive." Europe's high dependence on Russian raw materials is not limited to gas imports alone, which account for about half of supplies, he said. There is also a dependence on Russian imports for hard coal, and 30 percent for oil, he said. The main demand for natural gas in Germany comes from industry, which accounted for 37 percent of natural gas consumption in Germany in 2021. Households accounted for 31 percent of total consumption, 13 percent was used in trade, commerce and services, and another 13 percent went to electricity suppliers.

"Unfortunately, natural gas storage is currently at an all-time low," Wieland said. Heat pumps will not be able to be massively expanded over the course of a summer, so the question remains: How do we deal with the supply? According to Wieland, LNG imports alone cannot be the solution as LNG terminals still have to be built. Other important issues, in Wieland's view, would be extending the lifetime of nuclear power plants and restarting recently closed nuclear power plants.

Based on studies by institutions such as the ECB, banks and scientists, as well as its own calculations on a renewed increase in oil and gas prices, the GCEE has examined how a supply stop of Russian gas or an embargo would affect economic development and expects a further decline in GDP of three to five percent. “Then we end up in a deeper recession this year. In addition, we would have much higher inflation, between 8 and 9 percent. So our conclusion is that everything must be done now to prepare as well as possible for a supply freeze.”