Leading economic institutes see Germany on the verge of recession. “The German economy is paralyzed,” said the Munich Ifo Institute on Wednesday. “The mood among companies and households is poor and uncertainty is high.” The Ifo economists and the experts from the Kiel Institute for the World Economy (IfW) each assume that the gross domestic product (GDP) will shrink for the second quarter in a row at the beginning of 2024 and that Germany will therefore slip into a recession. Things are only likely to get noticeably better from the middle of the year.
However, for the year as a whole, government advisors expect a maximum of mini-growth and thus, in effect, stagnation. The Ifo lowered its GDP forecast from 0.7 to 0.2 percent, the Kiel experts even cut their estimate from 0.9 percent to 0.1 percent. “Consumer restraint, high interest rates and price increases, the government’s austerity measures and the weak global economy are currently dampening the economy in Germany and are leading to another winter recession,” said Ifo economics chief Timo Wollmershäuser in Berlin.
A noticeable recovery is still a long way off. However, there are signs of a slight improvement in the next few months: with the gradual removal of interest and price burdens as well as the effects of higher purchasing power for consumers, economic performance will accelerate in the middle of the year, said Wollmershäuser.
For 2025, the Ifo increased its forecast by 0.2 points to 1.5 percent, while the experts from Kiel continue to expect growth of 1.2 percent. “Overall, we assume that the gross domestic product in 2025 will only be a meager two percent above the level from 2019,” explained the IfW. Against the background of weak economic dynamics, the labor market appears to be quite robust. Employment is likely to “increase slightly” again in the current year before it begins a downward trend as a result of demographic change, the experts explained.
Things are likely to calm down on the inflation front
Despite the economic downturn, according to Ifo, the number of employees will climb from 45.9 to 46.1 million and reach a record level of 46.2 million next year. The number of unemployed will therefore only increase from a good 2.6 to 2.7 million and will fall again below 2.6 million next year.
Things are also likely to calm down on the inflation front. According to the Ifo, consumer prices will only rise by 2.3 percent in 2024, after 5.9 percent in the previous year. Next year, the inflation rate would even fall to 1.6 percent, below the two percent mark that the European Central Bank (ECB) sees as ideal for the euro area economy in the medium term.
According to the IfW forecast, the persistently high shortage of skilled workers will lead to significantly rising wages, also in response to the high inflation in recent years. With inflation expected to subside, “real disposable incomes will rise again in the current year for the first time in three years and stimulate private consumption.” With the updated estimate, the Ifo is at the level of the government forecast for 2024, the IfW slightly below.