The old adage that when the US sneezes, the rest of the world catches a cold could equally apply to Germany and the euro zone. Germany constitutes 25 per cent of the EU27′s gross domestic product (GDP), is home to 19 per cent of the EU’s population and, despite what the European Central Bank says, dominates the continent’s monetary policy.

So when Germany falls into recession, we all get caught in the gravitational pull. That’s what makes the Ifo institute’s latest U-turn forecast on the German economy so significant. It predicts the economy there will contract next year as a dramatic rise in energy costs due to the war in Ukraine extinguishes the chances of recovery after pandemic-related lockdowns. Just three months ago, the Munich-based think tank forecast the German economy would expand by 3.7 per cent next year, now it’s talking about 0.3 per cent contraction. At the same time, it bumped up its forecast for 2023 inflation by 6 percentage points to 9.3 per cent.

Stark reversal

This is a stark reversal and reflects the increasingly sticky economic environment, triggered principally by the energy crisis, that is now upon us. “The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following coronavirus,” said Timo Wollmershaeuser, head of Ifo’s economic forecasts. In its forecast, the Ifo said the first quarter of next year would be particularly rough for consumers as energy suppliers adjust their prices in response to high procurement costs, driving inflation to about 11 per cent. As a result, households will see their purchasing power decline, with a government relief package mitigating the blow but falling far short of offsetting it, the institute said.

Regardless of Ireland’s ever-buoyant gross domestic product, we’re likely to experience something similar: higher inflation for a prolonged period combined with Government measures that fall way short of relief. We’re headed for a winter of financial hardship.