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Germany has fiscal buffers to withstand big energy shock – Scope


Germany has fiscal buffers to withstand big energy shock – Scope By Reuters

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Economy 2 hours ago (Aug 29, 2022 08:01)

© Reuters. The head of new German Finance Minister Christian Lindner is pictured in front of the ministry’s logo during the handing-over of office at the German Federal Ministry of Finances in Berlin, Germany, December 9, 2021. Tobias Schwarz/Pool via REUTERS

BERLIN (Reuters) – Germany’s public finances are solid enough to withstand a major energy shock, even if persistent disruptions to gas supplies from Russia could hurt its growth prospects, credit rating agency Scope said in a study seen by Reuters on Monday.

The German economy barely grew in the second quarter, with the war in Ukraine, soaring energy prices, the COVID-19 pandemic and supply disruptions bringing it to the edge of a recession that the national central bank says is increasingly likely.

“Germany has the fiscal buffers and adequate financial reserves to weather a severe energy shock, though material damage to growth prospects could result from the continued disruptions of Russian gas supplies”, Scope analysts said.

Rating Germany’s sovereign debt ‘AAA’ grade with a stable outlook, the Scope analysts said the economy’s growth prospects had deteriorated significantly due to the war in Ukraine, forecasting growth of 1.6% in 2022 and 1.7% in 2023.

They originally expected more than 4% growth this year and 3% in 2023.

In their baseline scenario, the agency said sharp rises in energy costs coupled with new disruptions to global supply chains would lead to a recession – a contraction in two successive quarters – starting in the final quarter of 2022.

Even so, Scope expected Germany’s debt-to-GDP ratio to remain on course to fall below 65% by 2027 due to low interest rates and quickly recovering tax revenues after the pandemic.

Under a more pessimistic scenario with acute gas shortages, debt-to-GDP would rise to just over 75% in 2024. In comparison with European peers, this would still be modest: In Italy, the ratio is already some 150%, and in France it is around 113%.

“While economic damage would be unavoidable from Russia’s ‘weaponization’ of its energy exports, Germany maintains ample financial capacity for further temporary relief,” the Scope analysts said.

Germany has fiscal buffers to withstand big energy shock – Scope

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