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    Economists warn of massive effects if energy prices continue to rise

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    The Institute of German Economics (IW) in Cologne expects significant economic effects from persistently high energy costs. “The high price level burdens households with high energy costs and rising consumer prices,” write the authors of a current analysis available to the German Press Agency in Berlin. “All in all, the cost of living is increasing substantially.”

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    The authors run through various scenarios for rising energy prices – starting from a high starting point. The gas price alone has already quintupled on average between 2020 and 2021. However, the institute emphasizes that these are not forecasts but rather possible developments.

    Scenario one: situation would be “tense but solvable”

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    In the first scenario, the scientists assume that the price of natural gas will increase by 50 percent from the second to the third quarter of the current year, with normalization or calming down again only in the course of the coming year. At the end of 2023, the gas price would still be twice as high as the average for 2021.

    In this model calculation, the oil price rose slightly by 10 percent in the third quarter of the current year and fell back in the course of 2023, but would still be 45 percent above the annual average for 2021.

    These are realistic assumptions, says co-author Thomas Obst. There has already been an approximately 50 percent increase in the price of gas from February to March. The experts assumed that the price of oil would rise less because it is transported by ship instead of by pipeline and can therefore be replaced more easily.

    The researchers compared the additional economic costs of these developments compared to a baseline scenario. The baseline scenario assumes gas prices will fall by around a third and oil prices by around a fifth by the end of 2023 – both compared to the level of the second quarter of 2022.

    “The situation is tense, but solvable,” says Obst, describing this model calculation. Under these assumptions, the missing gas could be partially replaced, and the German storage facilities could be largely filled. At the same time, industry and consumers would save gas.

    Significant consequences for the economy

    The consequences for the German economy would be clearly noticeable in the first scenario compared to the baseline scenario. According to IW calculations, the inflation rate would rise by 0.9 percentage points in the current year and by 1.3 percentage points in the coming year.

    Economic performance would also suffer: Gross domestic product (GDP) would fall by 0.2 percent this year and by 1.3 percent in the coming year – the researchers factored out inflation in these calculations.

    Since people would have less money at their disposal, they would also buy significantly less: private consumption would be 1.1 percent below the baseline scenario. The companies, in turn, would have less money left for investments. These will fall by 0.4 percent in 2022 and by 3.1 percent in 2023.

    Scenario two: Significantly more pronounced situation

    In the second scenario, the experts assume far greater uncertainty in the gas supply and further restricted deliveries. Specifically, they assume that the price of natural gas will double and remain at this level in 2023.

    The assumed doubling of the gas price has recently been shown on the futures exchanges, says Obst: The prices for transactions with future deliveries, so-called futures, would have roughly doubled in mid-June. In addition, the price of oil would rise by 30 percent in this scenario. At the end of 2023, the gas price would be four times the 2021 annual average. Oil prices would be about 72 percent above 2021 levels.

    Under these assumptions, the effects would be even more pronounced. The experts then assume that the inflation rate will be 1 percentage point higher in the current year and 4 percentage points higher in the coming year – again compared to the baseline scenario.

    According to the calculations, gross domestic product would be 2 percent lower in 2023. Overall, the loss of economic output would be around 70 billion euros. Investments would fall by 0.4 and 4.2 percent this year and next, respectively.

    The unemployment rate could therefore increase by a little more than half a percentage point in 2023, and unemployment could rise by over 300,000 people.

    Normalization would mean that the uncertainty subsides

    Normalization would not return until 2024. “Normalization does not mean a return to the pre-war level,” emphasized Obst. He expects a complete restructuring of the energy infrastructure, for example through the construction of terminals for importing liquefied natural gas (LNG).

    “That costs money and time, especially since liquefied gas is more expensive than natural gas.” that it stays that way.”

    The two scenarios do not take into account possible production losses in the event of a complete gas supply stop, because the effects of this would be too complex from the point of view of IW and therefore difficult to represent in models.

    “Regardless of this, consumers and producers must be prepared for persistently high prices,” write the authors. “Relief packages that have been decided so far can only partially offset the expected additional burdens.” (dpa)

    Source: Tagesspiegel

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