Germany may face the highest inflation rates in decades, according to a report prepared by a group of economic research institutes, including Ifo.

The experts of the institutes have drawn up two scenarios for the development of the German economy amid a high level of uncertainty about energy supplies from Russia. The baseline scenario provides for the preservation of gas supplies and no further escalation of the negative impact on the economy due to the situation in Ukraine. The negative scenario envisages an abrupt termination of Russian energy supplies.

According to the baseline scenario, Germany’s GDP in 2022 will grow by 2.7%, while in the negative scenario – by 1.9%. At the same time, experts previously predicted that the economy will grow by 4.8% in 2022.

In 2023, growth is projected at 3.1% in the case of the baseline scenario and a decline of 2.2% in the case of the negative scenario.

Inflation is projected at 6.1% in 2022, which would be a 40-year high. However, it could reach 7.3% if energy supplies are cut off, which would be a record for Germany in post-war history.

The unemployment rate, according to the baseline scenario, would fall from 5.7% in 2021 to 5% in 2022 and 2023. The negative scenario envisages the rate at 5.2% in 2022 and 6% in 2023.

Meanwhile, experts note that the cumulative losses of the economy in 2022 and 2023 due to the suspension of supplies from Russia are likely to amount to about 220 billion euros, which corresponds to more than 6.5% of annual GDP.

“If gas supplies are cut off, the German economy will enter a sharp recession,” said Stefan Coutts, vice president and director of business cycle research at the Kiel Institute for the World Economy.

The easing of pandemic-related constraints is supporting service sectors, while persistent supply chain disruptions continue to undermine activity in the manufacturing sector, he said.