Germany's Economic Outlook

By Maria Martinez

BERLIN (Reuters) – Germany's economy is expected to contract by 0.2% in 2024, according to the economy ministry, marking the second consecutive year of shrinking output for the nation, the only member of the G7 major industrial democracies to experience this decline.

The government revised its forecast from 0.3% growth this year, as anticipated recovery in the year's second half did not materialize. Last year, Germany’s economy was already the weakest among its large euro zone peers, with a 0.3% decline in GDP.

If contractions persist for two consecutive years—which last occurred in 2002-2003—Germany would stand alone among G7 economies. Recent projections from the International Monetary Fund indicate continued economic challenges.

Contraction was noted in Q2, raising recession concerns, defined as two consecutive quarters of decline. Indicators like industrial production and the business climate suggest ongoing downturns into the latter half of this year.

Economy Minister Habeck emphasized that structural issues and geopolitical challenges have inhibited strong growth since 2018. The German economic model relies heavily on cheap energy from Russia and functional global export markets.

Industrial orders hint at a lack of recovery in Germany’s manufacturing sector. The economy, notably export-led, has been impacted by weak global demand and geopolitical strains, leading to a 0.3% contraction in exports last year.

Habeck noted, "Half of Germany's growth comes from exports, and global conditions are challenging. China’s aggressive export strategy poses additional threats."

The government forecasts a 0.1% decline in exports for this year as well. In response to both cyclical and structural challenges, a growth package composed of 49 measures is being proposed.

Habeck stated that effective implementation would boost the economy and restore employment levels. However, parliamentary approval is necessary, requiring support from opposition conservatives to navigate through the upper house representing Germany's 16 federal states.

Recovery Expected in 2025

By early next year, the ministry anticipates a gradual revival in growth dynamics, projecting 1.1% growth for 2025, a slight increase from an earlier forecast of 1.0%.

Growth is expected to resume primarily due to increased private consumption stemming from rising wages, lower inflation, and tax benefits. Reduced interest rates are also expected to stimulate consumer spending. However, construction investments are not anticipated to contribute until 2026.

For the first time, the government has included a forecast for 2026, predicting a 1.6% economy expansion. Inflation is projected to decrease to 2.2% in 2024, down from 5.9% last year, further easing to 2.0% in 2025 and 1.9% in 2026.

With a decline in inflation and falling interest rates, wages are expected to rise by 5.4% this year and 3.5% next year. "This means more disposable income for consumers, fostering higher purchasing power, consumption, and investment," Habeck explained.

This year, consumption forecasts remain weak, expecting only a 0.2% increase, followed by 1.0% growth in 2025.