German economic institutes expect GDP to contract again in 2024

Germany’s leading economic institutes have downgraded their forecast for 2024 and now see Europe’s largest economy shrinking by 0.1 per cent, they said in their autumn joint economic forecasts.

The forecast confirms the numbers Reuters reported exclusively earlier this week.

Germany’s economy was the weakest among its large euro zone peers last year with a 0.3 per cent contraction.

“In addition to the economic downturn, the German economy is also being weighed down by structural change,” said Geraldine Dany-Knedlik, head of forecasting and economic policy at DIW Berlin.

“Decarbonisation, digitalisation, and demographic change -alongside stronger competition with companies from China – have triggered structural adjustment processes that are dampening the long-term growth prospects of the German economy,” she added.

Economic growth is not expected to return to its pre-COVID trend for the foreseeable future.

“The growth rate has been halved compared to the period between the financial crisis and the pandemic,” said Oliver Holtemoeller, from the Halle Institute for Economic Research (IWH). He noted that the average growth rate in Germany between 2011 and 2019 was about 1.4 per cent.

The government’s economic growth package will fall short of the output boost of 0.5 per cent it says it can deliver next year, the economists said.

The impact will come later and the impulse will be softer than the government expects, Dany-Knedlik said.

“I would also like to say positively that it is a growth initiative and not a short-term economic stimulus programme. From this perspective, the government is clearly on the right track,” said Stefan Kooths, economist at the Kiel Institute for the World Economy (IfW).

While the German economy is expected to contract this year, the institutes forecast that the euro zone as a whole will grow by 1.4 per cent, accelerating to 1.6 per cent in 2025 and 1.7 per cent in 2026.

SLOWING INFLATION

Inflation in Germany will slow to 2.2 per cent this year from 5.9 per cent in 2023, according to the forecasts. It will then hover around the 2 per cent mark targeted by the European Central Bank over the next two years, the institutes said.

Even with inflation on a downward path, consumption remains weak as high energy costs, feeble global orders and high interest rates take their toll.

What has so far been a resilient labour market will start to feel the impact of the economic weakness. Unemployment is seen edging higher this year to 6.0 per cent from 5.7 per cent in 2023, a level not expected to be reached again until 2026, the forecasts showed.

The economic institutes now estimate German growth of 0.8 per cent in 2025, down from a previous forecast of 1.4 per cent, increasing in 2026 to 1.3 per cent.

The economy ministry incorporates the combined estimates from the institutes – Ifo, DIW, IWH, IfW and RWI – into its own predictions.

The German government’s latest forecast envisages economic growth this year of 0.3 per cent. An update is due in October.