Selected Issues Papers

Impact of High Energy Prices on Germany’s Potential Output

Author/Editor:

Yushu Chen ; Ting Lan ; Aiko Mineshima ; Jing Zhou

Publication Date:

July 24, 2023

Electronic Access:

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Summary:

The surge in energy prices since Russia’s invasion of Ukraine has reduced the energy-intensive sector’s production in Germany, although the non-energy intensive sector’s production has held up thanks in part to firms’ efforts to improve energy efficiency. Energy prices are expected to remain elevated in the foreseeable future, compared to pre-war levels, adversely affecting firms’ productivity and thus lowering Germany’s potential output. Economic modeling suggests that this effect could be around 1¼ percent of GDP in staff’s baseline, with some uncertainty around this estimate, depending on the ultimate magnitude of the energy price shock and the degree to which increased energy efficiency can mitigate it. Policies can promote effective adjustment to the shock by increasing productivity and maintaining strong price incentives to conserve energy and invest in renewable energy production.

Series:

Selected Issues Paper No. 2023/059

Subject:

Energy conservation Energy prices Environment Fuel prices International organization Monetary policy Potential output Prices Production Productivity

Frequency:

Regular