The economy is sluggish, the mood is bad, the outlook is bleak – it has been a long time since the economic situation in the first weeks of a new year seemed as bleak as it did this time. In such a situation, the regular presentation of the annual economic report would actually be the opportunity for the federal government to present a coherent concept for overcoming the crisis and to spread optimism. However, that is exactly what did not happen this Wednesday: The report that Vice Chancellor Robert Habeck (Greens) presented to the public describes in detail the problems and challenges facing the German economy. However, one looks in vain for a coherent anti-crisis program coordinated within the coalition in the 178-page paper. The SPD, Greens and FDP are still struggling to find a common course.
Instead, Habeck and Finance Minister Christian Lindner have been in a real competition over the past few days for the bleakest description of the situation. Habeck, for example, explained that after the decline of 0.3 percent last year, overall economic performance would probably grow by just 0.2 percent in 2024 – a “dramatically bad” value in his view. Lindner even spoke of a “downright embarrassing” number and also said that the Federal Republic had become a “sluggish” country over the years. Just on Wednesday, the OECD group of industrialized countries also presented new figures. In the last quarter of 2023, the OECD countries grew by an average of 0.4 percent – while Germany shrank by 0.3 percent. Only Great Britain performed similarly poorly.
The two ministries are reportedly working on their own concepts to deal with the crisis, but these will only be merged into one program in a second step. The problem is that Habeck and Lindner pursue different approaches that are difficult to combine. The Minister of Economic Affairs wants to use state aid to help the economy invest in the country’s climate-friendly restructuring. In his view, this requires significantly more public funds than would be available if the debt brake were adhered to. Habeck is toying with a special fund that could be used to boost investments in the renovation. Lindner, on the other hand, relies more on tax incentives for companies and wants to strictly adhere to the debt rule of the Basic Law. As far as the next steps are concerned, “admittedly there is no tick yet,” said Habeck when he presented the annual economic report on Wednesday.
The current crisis is accompanied by structural problems, says Habeck
Overall, despite all the successes in combating energy shortages and inflation, the German economy is still in difficult waters. “We are emerging from the crisis more slowly than hoped,” said the minister. Germany is suffering more and more persistently from the war in Ukraine, scarce energy and weakening world trade – not least because of its strong dependence on exports. This also explains why the German economy is doing worse than other European economies.
Added to this are high interest rates that are affecting the construction industry and the spending cuts that the Federal Constitutional Court forced with its budget ruling last November. “The situation is extremely challenging,” says Habeck. But it is also true that Germany suffers from structural problems such as a serious shortage of skilled workers. A real “reform booster” is needed, especially with a view to reducing bureaucracy, says Habeck. “It’s about nothing less than defending the competitiveness of the German industrial location.” The government must work together on this.
Economists see the situation even bleaker. There is currently no evidence of a rapid recovery, says Sebastian Dullien, head of the trade union-affiliated Institute for Macroeconomics and Economic Research South German newspaper. “In fact, the federal government’s new forecast may still prove to be too optimistic.” Instead of plus 0.2, he expects minus 0.3 percent growth this year. He also requires additional investments. Dullien warns that the debt brake is increasingly proving to be a “growth brake.” This increases the risk “that the economic weakness will develop into long-term stagnation, which would then also have an impact on the labor market.”
The Growth Opportunities Act is intended to provide incentives for investments
But at least the responsible minister sees light at the end of the tunnel. Recent wage agreements are likely to further improve consumer sentiment, while inflation will continue to fall. The federal government expects inflation to be just 2.8 percent this year, and Habeck expects a further decline in 2025. “In perspective,” he says cautiously, “we see a tendency for the situation to improve.”
However, investments must also be incentivized, he demands with a view to the so-called Growth Opportunities Act, which the Mediation Committee of the Bundestag and Bundesrat wanted to discuss on Wednesday evening. Among other things, it provides tax incentives for companies willing to invest; However, the relief has already been reduced from seven to three billion euros during the discussions and alone is unlikely to be enough to overcome the economic crisis. The CDU and CSU do not play a commendable role here either, as on the one hand they demand tax relief for companies in fire letters to Habeck and Chancellor Olaf Scholz (SPD), but then delay their introduction for political reasons.