German economy expected to contract again in 2024, economy minister says
By Maria Martinez
BERLIN (Reuters) -Germany’s economy is expected to contract by 0.2% in 2024, the economy ministry said on Wednesday, which is likely to make it for the second year running the only member of the Group of Seven major industrial democracies to post shrinking output.
The government is cutting its forecast from a previous projection of 0.3% growth for this year, as the expected recovery in the second half of the year failed to materialise.
Germany’s economy was already the weakest among its large euro zone peers and other G7 countries last year, with a 0.3% decline in gross domestic product.
If economic output contracts for a second consecutive year, which last happened in 2002-2003 when exporting and manufacturing industries struggled, Germany would be the only G7 economy in contraction, according to the latest projections of the International Monetary Fund.
The economy contracted in the second quarter, sparking fears of a possible recession, defined as two consecutive quarters of contraction.
Early indicators such as industrial production and business climate suggest that the economic downturn has continued into the second half of the year, the ministry said.
The economy has not grown strongly since 2018 due to its structural problems and geopolitical challenges, Habeck said.
The strength of the German economic model was based on two pillars: cheap energy for industry from Russia and functioning global markets for its exports, the economy minister said.
In industry, industrial orders published on Monday added to signs that manufacturing in Europe’s largest economy will not recover in the coming months.
As an export-oriented economy, weak global demand and geopolitical tensions took their toll on the German economy last year, when exports contracted by 0.3%.
“Half of Germany’s growth always comes from exports and if you look at what’s going on in the world, you have to say that this pillar is also under attack,” Habeck said. “China is pursuing an aggressive export strategy.”
The government expects a 0.1% contraction in exports this year.
To counter the cyclical and structural challenges, it has agreed a growth package of 49 measures.
“If they are implemented, the economy will be stronger and more people will come back to work,” Habeck said.
The plans must be approved by parliament later this year, meaning the coalition government need votes from opposition conservatives in the upper house, which represents Germany’s 16 federal states.
BACK TO GROWTH IN 2025
By the turn of the year, the growth dynamics should gradually revive again, the ministry said, expecting 1.1% growth for 2025, up from 1.0% previously.
Growth is expected to resume in 2025 due mainly to increased private consumption resulting from higher wages, falling inflation and tax relief, the ministry said. Lower interest rates should also stimulate consumption, it said.
But construction investments will not contribute to growth again until 2026, the ministry said.
For the first time, the government has included a forecast for 2026, when Germany’s economy is seen expanding by 1.6%.
Inflation is expected to decline further, slowing to 2.2% in 2024 from 5.9% last year, then to 2.0% in 2025 and 1.9% in 2026.
Apart from the decline in inflation, interest rates are falling and wages are expected to rise 5.4% on average this year and 3.5% next year.
“This means that more money is available again to people and this money will increasingly lead to higher purchasing power, higher consumption and higher investment,” Habeck said.
Consumption will remain weak this year due to the pessimistic mood of consumers, rising 0.2% according to the forecasts and then 1.0% in 2025.
(Reporting by Maria MartinezEditing by Gareth Jones and Toby Chopra)
