Dhe Ukraine war and its consequences continue to weigh heavily on the German economy. The Ifo Institute corrected its growth forecast for the current year to 2.5 percent on Wednesday, the experts had previously assumed 3.1 percent. The Institute for the World Economy (IfW) only expected growth of 2.1 percent this year. Both institutes referred to the high energy prices and ongoing delivery problems.
Industrial companies in the euro zone were still able to defy the momentum in April: They increased their production slightly. Compared to the previous month, the total production increased by 0.4 percent, the statistics office Eurostat announced on Wednesday in Luxembourg. Analysts had expected an average growth of 0.5 percent. The previous month’s decline was revised from 1.8 to 1.4 percent.
Energy production was significantly higher in April, rising by 5.4 percent on a monthly basis. In contrast, the production of capital goods fell by 0.2 percent. Preliminary products were manufactured 0.7 percent more. The industry has been suffering from significant supply bottlenecks for a long time, which can be traced back to the corona pandemic and the Ukraine war.
Economic output still at pre-pandemic level
“Economic output is currently still one percent below the pre-corona level at the end of 2019,” said Timo Wollmershäuser, head of the Ifo forecasts. In the second half of 2022, however, a gradual decline in raw material prices and supply bottlenecks are to be expected.
The high inflation, which the Ifo Institute estimates at 6.8 percent for 2022, has led to lower goods consumption by private consumers. However, as the pandemic subsides, consumption can be expected to normalize, which should “contribute significantly to the growth of the German economy”. The Ifo Institute forecast economic growth of 3.7 percent for the coming year .3 percent decrease.
Meanwhile, the eurozone’s trade deficit widened sharply in April. Compared to the previous month, the seasonally adjusted deficit rose by 13.9 billion to 31.7 billion euros, the statistics office Eurostat announced on Wednesday. This is by far the highest deficit in foreign trade since the currency area came into existence. The trade balance had already posted a record-high deficit in the previous month.
Exports in the euro area rise significantly less than imports
In April, exports rose by an adjusted 1.5 percent, according to Eurostat. However, imports increased by 7.1 percent. Eurostat points to a sharp increase in energy imports, a consequence of the sharp rise in energy prices due to the Ukraine war. The balance of trade is the difference between exports and imports. As a rule, the euro zone has a surplus in foreign trade.
With regard to the high inflation, the IfW in Kiel is not yet giving the all-clear: In the current year, the rate of inflation will be 7.4 percent, and in the coming year it will still average 4.2 percent, the institute said. The risk of entrenched inflation is therefore increasing.
“The current inflationary pressure is above all a consequence of the massive global fiscal programs during the pandemic phase,” explained IfW Vice President and Economic Director Stefan Kooths. He criticized the monetary policy steps taken by the European Central Bank (ECB) to date as “much too late” and “too hesitant”. This increases the risk “that inflation expectations will solidify,” Kooths explained.
Delivery bottlenecks and inflation are also having an impact on a global level: the strict no-Covid policy of the Chinese government alone will cost the global economy 0.2 percentage points of growth this year, the IfW explained. Overall, global economic output will increase by three percent this year, so the institute has revised its forecast downwards by 0.5 percentage points. For the coming year, it lowered its forecast by 0.4 points to 3.2 percent.