What impact has a year of war in Ukraine had on Germany’s economy?

Experts estimate that the war in Ukraine cost the German economy €100 billion and made most people €2000 poorer in 2022. But big businesses and the defence industry saw profits rise.

A tanker loaded with liquefied natural gas (LNG) at the floating LNG terminal
A tanker loaded with liquefied natural gas (LNG) at the floating LNG terminal "Neptune" in Lubmin in the German state of Pomerania. Germany has been looking for alternative energy sources since the start of the war in Ukraine. Photo: picture alliance/dpa | Stefan Sauer

It will come as no surprise to most people to learn that the war in Ukraine has had a significant impact on the German economy and individual wealth, as energy prices exploded and inflation rose to a post-war high in 2022.

Now, almost a year after the start of the war, the true scale of the economic impact on Germany has become clear. 

In an interview with the Rheinische Post newspaper, President of the German Institute for Economic Research (DIW) Marcel Fratzscher, said that the Ukraine war and the associated explosion in energy prices cost Germany nearly 2.5 percent, or €100 billion, in economic output in 2022.

READ ALSO: ‘Real’ wages fell at record speed in Germany last year

Fratzscher pointed out that Germany has been hit particularly hard economically by the crisis because of its dependence on Russian energy, its high share of energy-intensive industry and its dependence on exports and global supply chains.

The economist expects that the war will continue to increase the strain on the German economy and he warned that the German government and businesses should take countermeasures now to reduce further losses in the future. 

“Under no circumstances should the German government continue on its chosen path of massive subsidies for fossil fuels,” the Berlin-based economist said. “The energy price shock is, therefore, a painful but also a necessary wake-up call that will hopefully bring the economy to a faster transformation.”

“The damage to Germany as a business location has not yet been done, but will be done if companies do not massively accelerate the environmental, economic and digital transformation,” Fratzscher said.

READ ALSO: Bureaucracy and high taxes: Why Germany is becoming less attractive for businesses

According to The German Chamber of Industry and Commerce (DIHK), the impact on the economy as a whole translates to a loss of wealth of around €2,000 for every individual in Germany.

The figure comes from the 1.8 percent loss in growth that was originally forecast for 2022: the growth that failed to materialise corresponds to around €170 billion, amounting to a loss of around €2,000 per person.

The Cologne Institute for Economic Research (IW) expects the war in Ukraine will wipe out around €2,000 of individual wealth in Germany in 2023 as well.

Which sectors have grown?

But it hasn’t been bad news for everyone in the German economy. One industry which has, unsurprisingly, benefitted financially from the war is defence. 

In its latest annual report for 2022, Germany’s largest defence group Rheinmetall reported almost three times as many orders as in the same period of the previous year. Full-year figures are still pending, but are expected to continue this pattern, according to the Group and financial analysts.

READ ALSO: Germany to send ‘half battalion’ of tanks to Ukraine

Other defence companies are also reporting rising sales and profits and the “arms boom” is likely to continue for at least a few years.

Big German businesses also grew throughout 2022. The 40 German companies in the DAX stock market index – such as Adidas, Deutsche Bank and Siemens – broke records last year.

In the third quarter of 2022, the total sales of all Dax companies rose by around a quarter compared with the previous year, according to figures from Ernst and Young and, at, just under €45 billion, Dax profits were higher than ever before in the third quarter.

The boom for the DAX companies shows how the consequences of the Ukraine war are affecting the German economy unevenly.

EY Managing Director Henrik Ahlers Large explained that, while big corporations are relocating their production abroad more easily or bundling it in one place to operate more cheaply, small and medium-sized companies remain at the mercy of inflation.

“For energy-intensive industries, electricity and gas prices are becoming a matter of existence,” Ahlers said. If energy remains expensive, Germany risks losing more and more energy-intensive companies: some by relocating abroad, others by going bankrupt.

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German inflation slows sharply in May

German inflation fell sharply in May on lower energy costs, official data showed Wednesday.

German inflation slows sharply in May

Germany’s annual inflation rate eased to 6.1 percent, down from 7.2 percent in April, the federal statistics office Destatis said in preliminary figures.

Analysts surveyed by FactSet had expected a May reading of 6.4 percent, meaning that cost of living in Germany went up again, but by a little less than originally expected.

The drop was partly down to the comparison with May 2022, when energy prices soared in the wake of Russia’s invasion of Ukraine.

Energy prices have come down from their peaks in recent months, helped by government relief measures to cushion the impact on consumers and businesses.

Food prices, however, continued to show “above average growth” in May compared with a year earlier, Destatis said. While inflation has seen increases of nearly ten percent some months since the invasion, the prices for key food items, such as meat, eggs, or butter – have gone up by much more.

Increases for these goods have broken 20 percent in many cases.

READ ALSO: Which products are driving up inflation in Germany?

Prices in the service sector also cooled this month, “probably due in part to the introduction of the Germany ticket”, Destatis said, referring to the new public transport card allowing unlimited travel across Germany for 49 euros a month.

“The significant drop in the German inflation rate” brings “some relief”, said KfW chief economist Fritzi Koehler-Geib.

“But there is still a long way to go,” she said, before inflation reaches the European Central Bank’s two-percent target.

The ECB has hiked interest rates by an unprecedented 3.75 percentage points since last July in an attempt to bring down rapidly rising consumer prices.

ECB vice-president Luis de Guindos earlier on Wednesday welcomed “positive” inflation data out of key eurozone economies recently, but he too warned that the battle against high prices was not over.

“The data that we have received yesterday and today is positive, it’s a decline in headline inflation,” de Guindos told reporters.

“But I would not say that the victory is there,” he said.

“We are on a correct trajectory and we have to look very carefully at the evolution of core inflation” which excludes volatile food and energy prices, he added.

READ ALSO: Why inflation in Germany could slow down despite soaring food prices