Economic Outlook for Germany: Stagnation Predicted

By Maria Martinez

BERLIN (Reuters) – Germany’s economy is likely to stagnate this year, the country’s Ifo institute reported on Thursday, revising its forecast from a previous 0.4% growth.

“The German economy is stuck and is bobbing around in the doldrums, while other countries are feeling the upswing,” stated Ifo head of economic research Timo Wollmershaeuser.

The German economy contracted in the second quarter, raising concerns of a potential recession. A recession is technically defined as two consecutive quarters of economic contraction.

When questioned about the possibility of a recession, Wollmershaeuser chose to avoid the term, expressing that Germany’s economic growth is capped at about 0.5% per year, leading to average quarterly growth of just 0.1% to 0.2%.

“This means that we will very often find ourselves in situations where GDP is sometimes negative and sometimes positive, simply because of normal economic fluctuations. We can’t talk about recession every time. I much prefer the term crisis,” Wollmershaeuser added.

In its revised predictions, Ifo now expects a 0.9% growth in the economy next year, a decrease from a prior forecast of 1.5%, with growth anticipated at 1.5% in 2026.

Inflation has been decreasing this year, projected to be 2.2%, down from 5.9% in the previous year. Forecasts indicate a further decline to 2.0% in 2025 and 1.9% in 2026. Despite falling inflation, consumption is expected to remain weak.

Wollmershaeuser commented, “The order situation is poor and the gains in purchasing power are not leading to increased consumption, but to higher savings because people are insecure.” The current savings rate in Germany sits at 11.3%, notably higher than the 10-year average of 10.1% prior to the pandemic.

Unemployment is anticipated to rise to 6.0% in 2024 from 5.7% in 2023, with a slight drop to 5.8% next year and reaching 5.3% by 2026, according to Ifo.

Wollmershaeuser identified a structural crisis within Germany, pointing to insufficient investment, particularly in manufacturing, as well as stagnating productivity over recent years.

While German industrial orders saw an unexpected uptick in July, economists remain skeptical of a significant recovery in the sluggish sector, as the rise was influenced by a few large orders.

Manufacturing output is projected to decline by 2.0% this year compared to last year, based on Ifo’s forecasts.

Wollmershaeuser noted that various factors, including decarbonization, digitalization, demographic changes, the impacts of the coronavirus pandemic, energy price shocks, and China’s evolving role in the global economy, are applying pressure on established business models and prompting companies to adjust their production structures.