Leading economic research institutes expect the German economy to shrink this year. They lowered their forecast for the development of gross domestic product compared to the spring by 0.9 percentage points to minus 0.6 percent.
High inflation, a weak global economy, rising interest rates: the leading institutes have lowered their economic forecasts in view of the difficult environment. Instead of the previously expected growth in gross domestic product of 0.3 percent, a decline of 0.6 percent is now forecast for the current year.
This emerges from the joint diagnosis for the federal government. This joint diagnosis serves the government as a basis for its own projections, which in turn form the basis for the tax estimate.
Consumption is recovering more slowly than expected
“The most important reason for this is that industry and private consumption are recovering more slowly than we expected in the spring,” explained Oliver Holtemöller, Vice President of the Halle Institute for Economic Research (IWH). Growth is expected again in 2024, but at 1.3 percent it will be weaker than the 1.5 percent assumed in the spring.
By 2025 there should be an increase of 1.5 percent. “The economic weakness has now reached the labor market,” write the institutes. However, in view of the “notorious and increasingly worsening staff shortage in many areas”, they only expect a “moderate increase” to 2.6 million people in the current year. That would be around 174,000 more than in 2022. “The number of unemployed will probably fall slightly next year,” according to the forecast. In 2025 it is expected to fall further to less than 2.5 million.
Inflation rate is falling
The institutes have good news for consumers. “The situation on the price front is gradually easing,” says the joint diagnosis, which is entitled “Purchasing power is returning – political uncertainty is high”. The inflation rate is likely to be 6.1 percent this year, but will fall significantly to 2.6 percent in 2024 and then again to 1.9 percent in 2025.
“Wages have now responded to the inflation, so that the purchasing power of employees will increase again,” predict the economists. “This stabilizes private consumption.” Difficult times are predicted for the construction industry. Due to increased financing costs, residential construction investments are likely to “decrease significantly into next year.”
No major leaps upwards are expected in the export business for the time being. “The economic downturn in important sales markets such as the euro area and China, where there is particularly less demand for consumer and intermediate goods, is slowing exports,” the institutes emphasized. “In addition, the high energy costs, especially in the chemical industry, as well as the increasing shortage of skilled workers are also putting a strain on German export companies.” Therefore, exports are expected to fall by 1.0 percent in the current year, adjusted for prices, and then grow by 1.8 percent in 2024.
The joint diagnosis is prepared by the RWI in Essen, the Ifo Institute in Munich, the Kiel IfW, the IWH in Halle and the Berlin DIW, which is involved again after restructuring its in-house economic research.