Germany

Furthermore, the high producer prices are squeezing corporate margins as typically only around one half of the costs can be transferred to buyers. Following growth of almost ten percent in 2021, this year may see growth of just under three percent. The European Commission is still forecasting a vigorous expansion of five percent in exports and imports, which would see foreign trade contributing slightly to GDP growth. This could be rather too optimistic, particularly concerning export activity, while imports are likely to rise robustly due to the high volume and price of imported energy.

Germany

The technical recession feared in Germany at the start of the year has so far not come about. The reason for this is the robust recovery in those areas of the service sector that were still strongly affected by the Covid restrictions this time last year. The manufacturing sector, however, is struggling to deal with the consequences of the pandemic. Material and supply bottlenecks have continued to intensify in the last few months and there is no sign of the situation easing up any time soon. The war in Ukraine will continue to cause problems for the supply chains of German industry for the foreseeable future.

German foreign trade is being affected considerably by the current shortages in supplies. This is the main reason why foreign trade failed to contribute to growth in the first quarter of the year. The aftereffects of the lockdowns in China that have since been lifted will probably still be felt into the summer months. The uncertainty created by the outbreak of the war in Ukraine is also weighing heavily on trade. In view of the weak performance in the first half of the year, exports of goods and services are unlikely to expand by more than 2.5 percent in real terms for 2022 overall. On the import side, this should lead to less intermediates being purchased. However, the strong increase in prices for energy and non-energy commodities will lead to a substantial deterioration in the terms of trade and will drive the cost of imports up considerably. The import of services is expected to grow strongly this year as travel picks up again. All in all, imports are expected to grow by 4.5 percent in price-adjusted terms, thus clearly outperforming exports.

The lifting of protection measures to combat the pandemic gave a boost to private consumption at the beginning of the year. High-contact services benefited particularly in the first quarter. The increased number of employees, the aid packages to compensate for the increased energy prices and the adjustment of pensions in the middle of the year should be sufficient to stabilise private consumer demand. Even if only one quarter of the savings accumulated during the pandemic is spent on consumption it would lift growth in private consumption by more than two percentage points. Despite the recent high price increases, which will weigh down consumption in real terms, private consumption expenditure is set to grow by 3.5 percent. Regarding public consumption expenditure, the federal government expenditure for the support of refuges from Ukraine and for support measures to compensate citizens for war-related burdens is set to to increase public consumption expenditure further. We forecast an increase here to the scale of 0.5 percent.

Despite the high volume of investment needed to bring about the digital and energy transformation, investment activity is heading for only moderate growth this year. The main factors curbing investment are the uncertainties that have increased on account of the war in Ukraine. At the same time, additional investment would not be able to contribute to expanding production given the current shortages in materials. Growth momentum from plant and equipment investment is therefore likely to be low. In the case of construction investment, we expect levels to stagnate this year with increasing material shortages keeping investment down. The planned residential construction projects will not be affected by the interest rate turnaround yet this year. However, price increases are weighing down on

investments in public construction and the rise in building permits for commercial construction is purely fuelled by prices and has actually dropped off in real terms. Investment in other assets (software, research and development) has expanded by more than one percent already since the beginning of the year and should continue to recover in the further course of the year and grow by around two percent overall compared to last year. All in all, Germany’s gross domestic product is likely to increase by 1.5 percent in real terms this year compared to last year.