Germany, the world’s third largest economy, is likely to remain a laggard in terms of growth beyond 2023. Experts see the local economy as still in a difficult situation.
Recession in the current year and still only low growth rates: Current forecasts see the German economy only recovering with difficulty and returning to a growth path.
According to the economic barometer from the German Institute for Economic Research (DIW), the German economy will have a hard time avoiding a recession, i.e. a decline in gross domestic product (GDP), this year. The barometer fell for the third month in a row in November. At 85.3 points it is now almost three points lower than in October.
“It’s difficult to get out of the valley”
This means that the value is well away from the neutral 100-point mark, which indicates average growth in the local economy. After this shrank by 0.1 percent in the third quarter, the prospects for a small increase in the fourth quarter are still intact, according to DIW. Nevertheless, the German economy is “only getting out of the valley with difficulty,” says Timm Bönke, co-head of the DIW economic team.
Above all, high interest rates and only gradual increases in real wages put a strain on the economy. In addition, there are now new geopolitical uncertainties caused by the war in the Middle East. And last but not least, according to the researchers, the Federal Constitutional Court’s ruling on a strict interpretation of the debt brake is causing new problems. The possible elimination of some planned corporate subsidies is likely to have a significant impact on investment activity, especially in the next two years.
Laggards among the industrialized countries
In an international comparison, Germany, with its further clouded prospects, is one of the weakest-growing industrialized countries. The Organization for Economic Cooperation and Development (OECD) predicts that Germany will experience lower economic growth in 2024 than almost all other industrialized countries. The gross domestic product is only expected to increase by 0.6 percent due to weak exports, according to the organization’s “Economic Outlook” that has now been published.
Only in the neighboring Netherlands is the increase likely to be even lower at 0.5 percent. In contrast, the 38 industrial nations united in the OECD will grow by 1.4 percent according to the forecast. In 2025, Germany is expected to remain below the average of 1.8 percent at 1.2 percent. According to the OECD, Europe’s largest economy will shrink by 0.1 percent in 2023, while the OECD countries as a whole are expected to grow by 1.7 percent.
Budget crisis creates additional uncertainty
“The German economy is currently in a difficult phase,” OECD economist Isabell Koske told the Reuters news agency. “The energy crisis hit Germany more than other countries because industry plays a more important role in this country and dependence on Russian gas was much higher than in other countries.” High inflation has also reduced the purchasing power of households and thus affected consumption. And the current budget crisis is unsettling companies and consumers.