OECD Cuts German Growth Forecast

By Rene Wagner and Maria Martinez

BERLIN (Reuters) – The OECD has revised down its forecast for German economic growth next year, citing political uncertainty and strict fiscal policies, while still expecting stagnation this year.

The world’s third-largest economy is projected to grow by 0.7% in 2025, down from a prior estimate of 1.1%.

"In 2025, Germany will lag behind other OECD countries," said Isabell Koske from the OECD.

The recent collapse of Germany’s ruling coalition is expected to further strain the economy, and a potential Trump victory in the U.S. presidential election raises concerns of a trade conflict with Germany’s primary trading partner.

Medium-term uncertainty looms after the failure to finalize the 2025 budget and the government’s coalition breakup, according to the OECD.

The government had proposed multiple measures to revive economic growth, but these are likely to be postponed until early elections in February 2025.

Europe’s largest economy will underperform compared to the euro-zone average of 1.3% for 2024 and 1.5% in 2025.

By 2026, the OECD anticipates a growth rebound to 1.2%.

Low inflation and rising wages will aid real incomes and private consumption, according to the OECD’s economic outlook.

"Private investment is expected to gradually improve, backed by high corporate savings and declining interest rates, although policy uncertainty will still dampen investor confidence," they noted.

WEAK DEMAND AND TIGHT FISCAL POLICIES

Weak global demand has impacted manufacturing, and competition from Chinese products is particularly challenging for German manufacturers, especially in the automotive sector, OECD expert Robert Grundke told Reuters.

Exports are expected to slowly recover as demand strengthens in key trading partners, the OECD stated.

The relatively subdued growth in Germany can also be attributed to more stringent fiscal policies compared to other euro-zone countries, according to Koske.

The debt brake, restricting public borrowing, and a court ruling that limited special fund usage have resulted in a notable cut in public spending for 2024.

A new government will need to decide whether to permit increased public borrowing to support the faltering economy and consider reforms to the debt brake.

Both OECD experts advise a reform of the debt brake to create fiscal room to tackle a significant infrastructure backlog and push for green and digital investments.

Enhancing public spending efficiency, curbing harmful tax expenditures, improving tax enforcement, and allowing more flexibility were highlighted by the OECD as key recommendations for Germany.