German federal government lowers economic forecast

The German government expects economic output to decline by 0.2 percent this year. This means that it is correcting its forecast for the development of the gross domestic product significantly downwards, as Economics Minister Robert Habeck said on Wednesday in Berlin.

In the spring, the federal government had assumed a slight increase in gross domestic product of 0.3 percent.

The correction does not come as a surprise, as the major economic research institutes had also recently revised their expectations downwards. They expect a minus of 0.1 percent.

The main reason is uncertainty among companies and citizens. The persistently high level of interest rates is slowing down investments, companies are cautious due to the unstable economic and geopolitical situation, and private households are increasingly saving their income instead of investing in home ownership or consumption.

A recovery is expected for 2025

The German government is a little more optimistic than before for the coming year: it expects an increase of 1.1 percent. On the one hand, she hopes that private consumption will pick up again and more industrial products will be bought abroad. Then German companies would be able to invest more again.

On the other hand, the German government is relying on its growth package with tax relief, work incentives and electricity price reductions. “If they are implemented, and completely, then the economy will grow faster,” emphasized Habeck. “Therefore, the measures of the growth initiative must now be implemented decisively by everyone.” The federal states also have to make their contribution. The federal government fears that the states will block a number of measures in the Federal Council because this would mean they would collect less taxes.

Is the growth package enough?

Leading economic research institutes have recently expressed skepticism as to whether the package can provide the necessary impetus. Many measures have not yet been implemented.

Habeck also admits that more is needed to get Germany back on the growth path. Finance Minister Christian Lindner recently made similar comments. Habeck is now proposing additional measures: a significant reduction in network fees and a reduction in bureaucracy, for example in data protection. “The rule should be: only what appears to be a relief in practice counts,” said Habeck.

The federal government’s economic forecast is also a basis for the upcoming next tax estimate. Lower tax revenues than previously predicted and higher spending on social security could put a strain on the traffic light coalition’s budget negotiations. At the same time, however, lower growth prospects mean that higher borrowing is possible due to the debt brake mechanism.