Ukraine war dampens investment | Economic uncertainty jeopardises recovery in 2022 11/04/2022
The easing of restrictions has increased the prospects for rising employment, particularly in services. The reduction in short-time work, the planned increase in the statutory minimum wage and the high level of savings carried over from last year would all work towards increasing the consumption expenditure of private households but the sharp increase in energy and food prices are likely to cancel out this effect, lead to a considerable loss of purchasing power and dampen consumer demand. State consumption expenditure is, on the other hand, likely to expand on account of the support expected to be provided to refugees from Ukraine and the foreseeable support measures of the federal government to compensate war-related costs. Overall, we expect consumption expenditure to make a small contribution to growth. Investment activity is likely to be restrained this year despite the investment necessary to unfold the digital and energy transformation. The latest issue of ECB’s quarterly Bank Leading Survey released in early February pointed to a clear increase in the demand for corporate lending as a sign for a pickup in investment. The heightened uncertainties on account of the war between Russia and Ukraine is highly likely to make investors reticent to invest, especially as the most recent figures show a dramatic deterioration in export prospects. This will stifle momentum in investment in plant and equipment. The high demand for residential housing and the continuing favourable financing conditions should make for a stable development in residential construction, which accounts for the bulk of construction investment. Regarding commercial construction, the number of building permits increased last year although it remains uncertain how many of these buildings will be built. Alongside the reticent of investors on account of the war, an increase in mobile working is reducing demand for office and administrative buildings. Commercial civil engineering looks solid. In addition to the expansion of the rail network by Deutsche Bahn AG, many utility providers are planning investment in renewable energies and grid expansion. In public construction, the teething problems of the federal government company Autobahn GmbH should have been overcome by now, opening the way for funds to be spent on the new construction and expansion of the motorway network. We expect investment in other assets (software, research and development) to record low real growth as in the previous two years. All in all, gross fixed capital formation is only likely to contribute to growth on a low level. The consequences of war and their assessment The repercussions of the war in Ukraine will place considerable strain on German GDP growth this year. The ECB recently estimated the possible cut in growth for the euro area, quantifying the impact at between minus 0.5 and minus 1.9 percentage points. However, these estimates do not factor in additional financial policy measures taken by governments (ECB 2022). The OECD (OECD 2022) has also estimated the impact developments on the commodity and financial markets seen since the beginning of the war will have on global GDP if the military conflict continues. Continued military conflict, according to its calculations, would reduce global GDP growth in the current year by more than one percentage point and increase global inflation by 2.5 percentage points. European economies would be the most affected, alongside Russia and Ukraine. Growth in the euro area would be 1.3 percentage points lower with an increase in prices of two percentage points. On account of the high degree of uncertainty regarding the further course of the war and the impact on global markets, we will refrain from making predictions in the context of various scenarios at this point in time. A disruption in gas imports from Russia could, in particular, trigger complex cascade effects disrupting production in numerous industries the macroeconomic impact of which cannot be adequately modelled (see, e.g., Bachmann et al. 2022 and DIW 2022, and for estimates, IMK 2022).
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