Joint Economic Forecast 1/23: Stubborn core inflation – Time for supply side policies

The leading economic research institutes have raised their forecast for growth in German economic output in the current year to 0.3 percent. In the fall, they were still expecting a decline of 0.4 percent. “The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared in the fall. The main reason for this is a smaller loss of purchasing power as a result of a significant drop in energy prices,” says Timo Wollmershäuser, Head of Forecasts at ifo. Nevertheless, the rate of inflation will fall only slowly from 6.9 percent last year to 6.0 percent this year. Government relief measures and foreseeably high wage increases in Germany are strengthening domestic demand and keeping domestic inflation high. Only next year will this aspect of inflationary pressure also ease, bringing the inflation rate down noticeably to 2.4 percent. Gross domestic product is then expected to grow more strongly again by 1.5 percent.