Research Germany: Zeitenwende
|- With the risk of a sudden Russian gas supply-stop still lurking in the background and a government that seems falling back into old fiscal habits, just at a time when the post-pandemic consumption boost is fading, Germany's economy is in for challenging times. We revise down our growth outlook, while expecting inflation pressures to linger for longer due to higher energy prices.
- To kickstart its growth prospects, Germany needs a Zeitenwende (paradigm shift) beyond foreign and security policy in our view. Accelerated investment spending on infrastructure, digitalisation and the green transition provide a silver lining, but until Europe's energy crisis is resolved, Germany is unlikely to return as the euro area's economic powerhouse anytime soon.
- A complete Russian gas cut-off would result in a recession lasting for several quarters, accompanied by rising unemployment and prolonged high inflation in our view. Government support could cushion the blow, however, ultimately the severity of the ensuing recession would depend on the duration of rationing and success in energy saving measures by consumers and firms.
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