Frosty prospects for the German economy
At the turn of the year, global production should continue to expand at roughly the same rate as in the decade before the pandemic. The economy remains remarkably robust in the US, but performs only modestly in the euro area. In China, a property crisis continues to weigh on residential construction and the finances of households, firms and regional authorities. The US president-elect is expected to at least partially fulfil his campaign promise of tariff increases in 2025. This will result in higher prices and a more restrictive monetary policy in the US, because output is already at more than full capacity. The consequences for global trade and German exports will be negative, and the international division of labour will become less efficient. In the short term, however, trade and production are likely to benefit from attempts to pre-empt tariff increases by concluding deals quickly.
The German economy continues to stagnate at the end of 2024. Economic production and exports are currently only around the same level as in 2019. In the third quarter, investment in equipment was significantly lower than in 2019. The poor export business explains the declining demand for new equipment. “Structural problems such as the rise in energy prices in Germany, the ageing of the labour force and the shortage of skilled workers are not easy to solve,” says Oliver Holtemöller, head of the Macroeconomics Department and Vice President at the IWH. “This leads to uncertainty among private households that react by saving more.” In addition, uncertainty about economic policy has increased more and more. Concerns about jobs are also emerging, as employment growth has come to a standstill. Gross domestic product is expected to stagnate again in the final quarter of 2024. In the first few months of 2025, the federal government's provisional budget will limit public spending, which is an additional dampening factor. However, a new government will be formed sometime next spring. This should reduce economic policy uncertainty, and private consumption is likely to pick up somewhat. After all, real net wages have recently risen significantly. The looser monetary policy is also helping the economy. “Still, a strong upturn is not to be expected,” says Oliver Holtemöller.
There are considerable risks to this forecast. Firstly, large firms in the manufacturing sector have recently announced significant job cuts. If the reports of large-scale job cuts continue, the recovery in consumer demand forecasted here would probably not materialise in the coming year according to the IWH researchers. In addition, a global trade war would hit the export-orientated German economy particularly hard. Finally, there is a domestic political risk: “If economic confidence is to increase again, a stable government with a recognisable economic policy concept has to be formed next spring,” economist Oliver Holtemöller says, “and there is no guarantee that this will happen.” For 2024, the 68% forecast interval for GDP growth ranges from –0.5% to 0.1%, for 2025 from –0.9% to 1.9% and for 2026 from –0.5% to 3.3%.
The extended version of this forecast contains three boxes (all in German):
Box 1: On the estimation of potential output
Box 2: On the effect of the start of production at the Grünheide car factory on gross domestic product in Brandenburg in 2022 and 2023
Box 3: On the public deficit in the context of European fiscal rules
Publication:
Drygalla, Andrej; Exß, Franziska; Heinisch, Katja; Holtemöller, Oliver; Kämpfe, Martina; Lindner, Axel; Mukherjee, Sukanya; Sardone, Alessandro; Schultz, Birgit; Zeddies, Götz: Konjunktur aktuell: Frostige Aussichten für die deutsche Wirtschaft. IWH, Konjunktur aktuell, Jg. 12 (4), 2024. Halle (Saale) 2024.
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Related Publications
Konjunktur aktuell: Frostige Aussichten für die deutsche Wirtschaft
in: Konjunktur aktuell, 4, 2024
Abstract
<p>Zur Jahreswende dürfte die weltweite Produktion weiterhin in etwa so schnell wie in der Dekade vor der Pandemie expandieren. Die Konjunktur im Euroraum ist nur verhalten, und die Stagnation der deutschen Wirtschaft setzt sich fort. Die Industrie verliert an internationaler Wettbewerbsfähigkeit. Unternehmen und Verbraucher halten sich aufgrund unklarer wirtschaftspolitischer Aussichten mit ihren Ausgaben zurück. Das Bruttoinlandsprodukt dürfte im Jahr 2024 um 0,2% sinken und im Jahr 2025 um 0,4% expandieren.</p>
