Germany's economy will shrink next year as a sharp increase in energy prices due to the war in Ukraine nullifies the chances of recovering from the pandemic quarantine. This was stated by the Ifo Institute, Reuters reported.

The institute changed its June growth forecast of 3.7 percent for 2023 and now predicts that Europe's largest economy will shrink by 0.3 percent. At the same time, it raised its 2023 inflation forecast by 6 percentage points to 9.3%.

For 2022, Ifo lowered its growth forecast to 1.6% from 2.5% and raised its inflation forecast to 8.1% from 6.8%.

According to the institute, the first quarter of 2023 will be especially difficult for consumers as energy suppliers adjust their prices in response to high procurement costs, causing inflation to rise to about 11 percent. As a result, households' purchasing power will decline; the government's bailout package will soften the blow, but fall far short of offsetting it, the institute said.

Price increases should gradually subside over the coming year (calculated on the assumption that there will be enough gas in winter), and energy prices will begin to decline no later than spring 2023, the institute said.

For 2024, Ifo forecasts economic growth of 1.8% and inflation of 2.5%.

Germany's economy grew slightly in the second quarter, thanks to household spending and government spending.