Germany’s Economy: Expected Impact of War in Ukraine

Economic Contraction and Recovery Expectations

In 2020, Germany’s economy contracted by 4.6% due to the pandemic, despite massive fiscal and ECB monetary policy stimuli. However, before the war in Ukraine, growth was expected to pick up further as:

• Supply disruptions were dissipating
• Private consumption was rebounding
• Production was catching up with historically high unfilled orders

Impact of the War on Germany’s Economy

The gross impact of the war is estimated at about 2.5% of GDP in 2022, resulting in a projected GDP growth at about 1.5%. This is due to:

• Fiscal relief measures offsetting only about 0.5% of the impact
• Projected GDP growth reduced from previous expectations

Inflation Projections and Government Support

Inflation is projected to spike above 7% due mostly to ongoing supply constraints in manufacturing and passthrough from energy inflation. The government has implemented measures to:

• Extend key COVID-19-related fiscal measures until June 2022
• Help households and firms cope with higher energy costs
• Secure energy supplies

Credit Growth and Financial Conditions

Credit growth supported the recovery in 2021, but financial conditions started to tighten recently, with:

• Interest rates rising
• New mortgage and nonfinancial corporates’ loans increasing

However, amid the pandemic, corporate increased indebtedness was matched by higher precautionary cash holdings, and the NFC sector’s nonperforming loans (NPLs) reverted to pre-pandemic lows.

Conclusion

The war in Ukraine is expected to delay Germany’s economic recovery. However, the government has implemented measures to support households and firms affected by rising energy costs, mitigating some of the impact on the economy.