Germany cuts GDP estimates

The German government has cut its 2024 GDP estimates, saying that “Europe’s largest economy will contract for the second consecutive year before the recovery begins in 2025”. The executive estimates that GDP will contract by 0.2% in 2024, a sharp cut from the 0.3% expansion forecast previously. In 2025, the government expects the economy to grow by 1.1%, up from 1% previously.

The downward revision of the forecasts comes after a series of negative events that have weighed on Germany’s economic recovery, in particular the freezing announced in September of an important project of the giant Intel in the country and Volkswagen’s announcement of possible plant closures and layoffs.

Structural problems

The German economy, which has long benefited from cheap energy thanks to Russian gas supply deals and sustained exports, particularly to China, is now feeling the brunt of the war in Ukraine and weak global demand, in a context of protectionist tendencies. “Germany and Europe are involved in the crises between China and the United States and must learn to make their voices heard,” Economy Minister Robert Habeck told the press.

At the same time, Germany is facing structural challenges such as an aging population, increasing Chinese competition, a cumbersome bureaucracy and a complex ecological transition. These problems “are starting to take a toll”, the minister insisted, adding that the government is taking the initiative to strengthen economic activity.

Due to its unresolved structural problems, the German economy “has not seen significant growth since 2018”, before the Covid crisis shook things up, according to Habeck. The Green minister also attacked the “debt brake” rule enshrined in the Constitution, which limits state resources for investment. According to the minister, “with greater (budgetary) room for maneuver, our economy could finally emerge from the impasse.” The industry is also calling for the abolition of the rule.

On the economic front, despite the euphoria of the European football tournament and the wage increases, private consumption is struggling to take off due to the prevailing climate of uncertainty and the increase in unemployment, which encourages consumers to save as a precaution. Weak foreign demand and restrictive monetary policy continue to weigh on activity, and leading industry indicators show that the phase of weakness will continue in the second half of the year, according to the Ministry of Economy.

Measures for growth

According to the Ministry, growth momentum is expected to resume from the end of 2024. Chancellor Olaf Scholz’s government, still very unpopular, is counting on its “growth initiative” proposed this summer, which includes a package of measures to be implemented quickly. The plan includes tax breaks, a permanent reduction in energy prices for industry, a reduction in bureaucracy and incentives to keep older people in the job market and attract skilled workers from abroad to address labor shortages.

The government’s plan remains “insufficient to revive the economy”, commented Peter Adrian, president of the German Chamber of Commerce and Industry (DIHK). Five major institutes (DIW, Ifo, IfW Kiel, IWH and RWI) had already estimated in September that growth would not return to its pre-pandemic pace and had already lowered their annual forecasts. These now range from stagnation to a slight recession. For the next two years, these institutes are less optimistic than Berlin, predicting a weak recovery with GDP increases of 0.8% in 2025 and 1.3% in 2026.