German economy expected to contract slightly in 2023, Ifo says

BERLIN (Reuters) – The German economy wont be able to escape a recession in 2023, but following two quarterly contractions in the winter, it will start its recovery in spring, said the Ifo economic institute.

In the first quarter, gross domestic product (GDP) is expected to contract by 0.2%, according to Ifos forecasts published on Wednesday. The economy contracted by 0.4% in the fourth quarter of 2022 compared with the previous three months.

A recession is commonly defined as two successive quarters of contraction.

The institute forecasts economic output in 2023 will remain at roughly the same level as the year before, posting a 0.1% contraction.

Inflation will take its toll on consumer-related sectors, which will act as a drag on growth, but on the other hand, industrial activity will support the economy, Ifo said.

“From the middle of the year at the latest, rising real wages will support the domestic economy,” Ifo economic researcher Timo Wollmershaeuser said. Real wage growth will be driven by noticeable increases in collectively agreed wages, as well as gradually falling inflation rates.

In 2023, inflation is expected to fall to 6.2%, while in 2024, it will decline to 2.2%, according to the economist.

Falling energy prices and an easing of supply chain bottlenecks are the reasons for the gradual decline, Ifo said.

In 2024, the German economy is expected to grow strongly, expanding by 1.7%, according to the institute.

(Reporting by Rene Wagner and Maria Martinez; Editing by Miranda Murray)