Economic Outlook - Ifo Institute Lowers 2024 Forecast for German Economy
Germany's economic future looks less rosy according to the influential Ifo Institute based in Munich. Their latest forecast reveals a sobering prediction of only 0.9% annual GDP growth for 2024, a far cry from the previous expectation of 1.4%.
Timo Wollmershäuser, the head of economic research at the Ifo Institute, discussed the economic scenario during a meeting in Berlin. He pointed out that the current quarter performance fell short of expectations, and this underperformance will likely impact future growth.
Uncertainty is Slowing Recovery
Wollmershäuser noted that consumers are saving much more and companies are less inclined to invest, due to the uncertainties circling the federal budget. This circumstance might pull the economy's growth rate down to 0.7% if the budget were to be reduced by 20 billion euros.
However, despite the challenges, the general direction for recovery still seems positive. Wages are surging, employment rates are at record highs, and inflation will likely decrease from around 6% this year to below 2% in 2023. Interest rates have peaked, and purchasing power should rebound, leading to an increase in overall economic demand. The Ifo Institute anticipates a 1.3% economic expansion in 2025.
Unemployment Projections
The Ifo economists expect an increase of 191,000 individuals unemployed in 2022 and another 82,000 in 2023. This would result in an unemployment rate of 5.9%. The workforce should continue growing this year by 353,000 and another 83,000 people in 2023.
DIW Pessimistic on Future Growth
The German Institute for Economic Research (DIW) shares a similar sentiment in their outlook. They predict a much slower economic recovery in the following two years due to consumers’ reluctance to spend. The DIW now expects a 0.6% growth rate in 2023 and 1.0% in 2025.
"German government savings and their lack of full spending implementation for the coming two years are major contributing factors to this forecast," explained the DIW. The government's budget decisions have already been accounted for in the DIW's forecast, and they anticipate that the agreed cuts will depress growth by 0.3 percentage points in 2024.
Private consumption remains weak, primarily due to high energy prices for gas and electricity, affecting consumers’ spending power. Moreover, the agreement in the budget dispute does not seem to offer any stimulus, given the low priority assigned to investment.
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Enhancements:
- The economic downturn predicted by both the Ifo Institute and the German government results from several factors, including structural challenges, global crises, and the impact of inflation and energy costs on financial resources.
- Bureaucratic hurdles and high investing costs are preventing private and public investments, contributing to the sluggish economy.
- The energy crisis, exacerbated by Western sanctions against Russia, has led to reduced Russian gas supplies, increased energy costs for industries and households, and higher transportation costs due to re-routing of oil through third countries.
- Trade policy uncertainty is another factor impacting investment and consumer sentiment, resulting from the new U.S. administration's economic and trade policies.
- Inflation rates, primarily due to increasing carbon prices and costs, are high and projected to gradually decrease but remain a concern in the short term.
- The high prices of diesel and gasoline have enhanced mobility and transportation costs significantly.
- Regulatory burdens are constantly escalating, calling for more market-based incentives and instruments to streamline bureaucratic hurdles.
- The upcoming early parliamentary election is adding to the uncertainty in Germany, as candidates advocate contrasting strategies for economic revitalization.
