(Bloomberg) -- The German government forecast growth this year as measures to deal with the energy crisis and brightening business sentiment help Europe’s biggest economy avoid a slump.

Output is expected to increase by 0.2% in 2023, according to projections from the Economy Ministry published on Wednesday. This compares with its October prediction of a 0.4% contraction.

Germany is navigating the winter energy crunch in better shape than had been feared just a few weeks ago, thanks in part to steps to diversify gas supplies as well as a drop in prices due to mild winter weather and well-filled stocks. Inflation is also slowing and supply-chain constraints are easing.

Economy Minister Robert Habeck said the country is still likely to first go through a recession — typically defined as two consecutive quarters of contraction — as growth stagnates and fluctuates around zero, though it will avoid a sharp downturn.

“The message is that we have made the crisis manageable,” Habeck said. “This does not mean that the crisis is over. But we were able to avert the worst scenarios.”

Chancellor Olaf Scholz told Bloomberg last week that he was absolutely convinced that the country would not go into recession as it faces down an energy crisis that has been exacerbated by Russia’s invasion of Ukraine.

The head of the Munich-based Ifo Institute, Clemens Fuest, was also more optimistic on Wednesday.

“It does look like Germany is going to avoid recession,” he told Bloomberg Television. “The expectation until recently was that the fourth quarter in 2022 might be negative and the first in 2023 as well. Now it looks like we’ve had stagnation in the last quarter.”

Ifo’s gauge of company expectations rose to 86.4 this month from 83.2 in December — the fourth consecutive improvement and a bigger increase than economists had anticipated.

“Companies are telling us they are optimistic regarding the next six months, and that suggests overall we will avoid a technical recession,” Fuest said. “We still expect a shrinking economy in the first quarter, but then an improvement toward the summer.”

Increased Investment

A survey of purchasing managers by S&P Global published on Tuesday showed that the German services industry grew in January for the first time since June, with private-sector activity holding up and inflationary pressures continuing to cool.

The Economy Ministry forecast that inflation will slow to 6% in 2023 from 7.9% last year. It also said businesses are expected to increase investment in plants and equipment by 3.3% this year, compared with 2.5% in 2022.

“Companies are demonstrating confidence again,” the ministry said. “The mood has noticeably improved.”

People familiar with the new forecasts told Bloomberg on Tuesday that while the economy will grow this year, the government is also scaling back its projection for next year to 1.8% from 2.3%.

--With assistance from Tom Mackenzie and Alexander Weber.

(Updates with comments from economy minister starting in fourth paragraph, comments from Ifo president starting in eighth)

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