The German economy's outlook blues have deepened a bit, as the Bundesbank has slashed its forecast for growth in 2024. The central bank, based in Frankfurt, now expects a minor contraction of 0.1% in 2023 and a meager expansion of 0.4% in 2024. Despite the downgrade, Bundesbank President Joachim Nagel is holding out hope that the German economy will bounce back in 2024, gradually regaining its stride.
The current economic slump is mainly due to weak foreign demand and cautious private consumption, with higher financing costs dampening investment. But good news is on the horizon; Nagel maintains that from early 2024, the German economy will turn the corner, marking a return to growth.
Inflation, the relentless foe of economic recovery, is also showing signs of receding. The Bundesbank anticipates a dramatic reduction in the inflation rate by half in 2024, but warns that while it's improving, it's still premature to breath a sigh of relief. The current inflation rate in Germany, measured by the European Harmonized Index of Consumer Prices (HICP), stands at 6.1% in 2023, predicted to drop to 2.7% in 2024.
Industry's woes, labor shortages, sluggish demand, geopolitical uncertainties, and structural challenges are some of the reasons for the German economy's subdued growth.
Looking ahead, the German economy is predicted to have a listless start in 2025, with Q4 2024 seeing a contraction. But the long-term outlook suggests a gradual recovery, driven by domestic demand and supported by stable employment and inflation rates.
Additional Insights
The industry sector has been struggling, with consumer good production down and passenger car manufacturing in decline. Surveys suggest deteriorating short-term production plans and export expectations, placing industry under intense pressure to adapt. The construction sector, too, has been impacted by labor shortages and sluggish demand. Uncertainty and geopolitical risks, including the potential re-emergence of US tariffs, have added to the challenges.
The German economy grapples with structural challenges such as labor shortages, excessive bureaucracy, and underinvestment. These issues, combined with restrictive fiscal policies, have hampered growth. The end of tax-free household bonuses also plays a role in the projected decline of the deficit.
The general government deficit is forecast to decrease to 2.0% in 2025, propelled by stable employment, rising wages, and the phasing out of tax-free household bonuses. The deficit is set to decrease further to 1.8% in 2026, translating into a broadly neutral fiscal stance by 2025.
Sources:
