The Ifo Institute has revised its prediction for Germany's economic growth in 2024, painting a more pessimistic scenario than initially anticipated. Instead of the previously expected 1.4% growth, the institute now forecasts a modest 0.9% increase in the country's GDP.
Timo Wollmershäuser, head of economic research at the Ifo Institute, explained that the current quarter's development has fallen short of expectations and that this will have consequences in the following year. One of the factors contributing to this economic downturn is consumers' growing preference for saving, coupled with a decline in businesses' investment enthusiasm. The uncertainties surrounding the federal budget are also playing a role in this trend.
Despite these challenges, Wollmershäuser remains hopeful, pointing out that wages are rising, employment is higher than ever before, and inflation is beginning to subside. Inflation is expected to decrease from around 6% this year to a more manageable 2% in 2025. Interest rates have passed their peak, and purchasing power is making a comeback. These positive trends should help boost overall economic demand.
On a somber note, the Ifo Institute predicts an increase in unemployment of 191,000 people this year, followed by an additional 82,000 in 2025. This would result in an unemployment rate of 5.9%. However, the number of people in employment is expected to grow by 353,000 in 2024 and an additional 83,000 in 2025.
The German Institute for Economic Research (DIW) shares similar concerns, forecasting a slower-than-expected recovery in the next two years due to consumers' reluctance to spend. The DIW now predicts a mere 0.6% growth in 2024 and a 1.0% expansion in 2025. The DIW attributes this situation to the impact of high energy costs on consumers' spending habits, as well as the German government's decision to make savings and refrain from implementing all the promised or announced spending measures.
The agreement reached in the budget dispute is not expected to lead to a significant boost for the German economy, according to the DIW. The institute explains that this is because the agreement prioritizes savings over investment, which could potentially negatively impact Germany's competitiveness in the long run.
References:
[1] The Ifo Institute for Economic Research, headed by Timo Wollmershäuser, cited high electricity costs as one of the factors affecting Germany's economic situation. [2] The Federal Government will closely monitor labor market trends due to the lower economic forecast for 2024. [3] Household savings rates have increased due to uncertainties surrounding the German budget, according to the Ifo Institute's research. [4] The DIW believes that consumers' reluctance to spend on energy costs is one of the main reasons for slower economic growth forecasts. [5] The Ifo Institute's predictions for 2025 include a forecast of a 1.3% economic growth rate, assuming a gradual return of purchasing power and overall demand. [6] The agreement in the budget dispute will not provide a significant impetus to the German economy, according to the DIW, as it prioritizes savings over investment and could potentially negatively impact Germany’s competitiveness in the long term.
Enrichment Data:
- The Ifo Institute's economic forecast for Germany in 2024 has been revised downward, indicating a more significant contraction than initially estimated.
- Germany's GDP contracted by 0.2% in the fourth quarter of 2024, a larger decline than the previously forecasted 0.1% decrease.
- Exports plummeted significantly in the fourth quarter of 2024, impacting overall economic activity.
- Factory output in the first two months of Q4 was weak, and manufacturing activity continued to decline.
- Private consumer spending and government expenditure increased at the end of the year, but these gains were insufficient to offset the decline in exports and manufacturing output.
- The German economy has been experiencing persistent stagnation, with inflation-adjusted GDP only slightly above pre-pandemic levels from 2019.
- The economic downturn is impacting the labor market, with many industries opting to reduce their workforce.
- Early indicators do not suggest a recovery in the first quarter of 2025, with analysts predicting only a weak economic rebound in the spring months.
- In light of these challenges, economic growth in 2025 is expected to be rather lackluster, with inflation continuing to drop but not to the levels seen before the COVID-19 pandemic.
