Scholz Advisers Warn of German Recession Danger If Gas Flow Ends

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Germany faces a “considerable risk” of lower output and possibly even a recession because of its high dependency on Russian energy, according to a panel of advisers to Chancellor Olaf Scholz.  

Even without a gas-supply shutoff, the Council of Economic Experts prediction is that gross domestic product will rise just 1.8% this year, down from a November projection of 4.6%. The revised outlook published on Wednesday shows German output may reach pre-pandemic levels only in the third quarter, well behind other advanced economies.

There’s a risk growth could be even weaker and inflation even faster due to “high dependency on Russian energy supplies,” the economists cautioned. 

Their warning followed Germany’s decision on Wednesday to activate an emergency plan to manage limited energy supplies, as concerns mount that Russia could shut off gas deliveries. 

“Germany should immediately pull out all the stops to arm itself against a freeze on Russian energy supplies and end its dependency on Russia,” the advisers said. 

The four-member panel of leading economists -- Veronika Grimm, Monika Schnitzer, Achim Truger and Volker Wieland -- sees higher energy costs driving inflation to 6.1% for the year as a whole. That would be the fastest pace since the early 1990s. For 2023, the council sees GDP rising 3.6% and inflation at 3.4%. 

Annual price growth in Europe’s biggest economy probably already exceeded 6% this month, according to the median forecast of 25 economists. Those data will be released later on Wednesday. An earlier report from Spain showed inflation at almost 10%. 

The government in Berlin initiated the first of three possible phases of a plan to deal with squeezed energy supplies, Economy Minister Robert Habeck said Wednesday. 

The first stage involves intensive monitoring of consumption and reserves. Germany relies on Russia for more than half of its natural gas, almost half of its coal and about a third of its oil. 

Even before Russia’s war in Ukraine, the economy faced considerable setbacks from pandemic-related supply constraints, an issue which has now worsened, according to the advisers’ report. 

Higher prices for energy are burdening companies and private consumption, though services could bolster momentum over the summer if the pandemic situation allows, they said.

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