Stay informed with free updates
Simply sign up to the German economy myFT Digest — delivered directly to your inbox.
Five of Germany’s top economic research institutes have slashed their growth forecasts for Europe’s largest economy as exports fall and domestic demand fails to pick up.
The five institutes forecast that growth in German gross domestic product this year would be 0.1 per cent, down from their earlier expectation of 1.3 per cent six months ago.
They warned that domestic demand had picked up less than expected, while a loss of competitiveness for energy-intensive goods as a result of high gas and electricity prices was hitting exports.
“Cyclical and structural factors are overlapping in the sluggish overall economic development,” said Stefan Kooths, head of economic research at the Kiel Institute for the World Economy. “Although a recovery is likely to set in from the spring, the overall momentum will not be too strong.”
Germany’s economy shrank 0.3 per cent in both the fourth quarter and over the whole of 2023, making it the worst performing major economy in the world last year. The institutes still expect growth to pick up next year to 1.4 per cent, down only slightly from their previous forecast of 1.5 per cent.
The country’s large manufacturing sector has suffered from higher energy costs and weaker global demand for machinery and equipment that is Germany’s traditional strength, while consumers have reduced spending because of higher prices and borrowing costs.
The German economy is also being squeezed by a sharp tightening of fiscal policy as the government prepares for the return of the constitutional debt brake, which limits the amount of new debt it can issue and had been suspended since the coronavirus pandemic started in 2020.
The five institutes forecast the government budget deficit would shrink from 2.1 per cent of GDP last year to 1.6 per cent this year and 1.2 per cent next year.
The institutes expect German inflation to fall from 5.9 per cent last year to 2.3 per cent this year and 1.8 per cent in 2025. But they expect wages to grow faster, projecting an increase in German salaries of 4.6 per cent this year and 3.4 per cent next year.
“This means that real wages will increase over the entire forecast period and make up for the losses from 2022 and the first half of 2023,” they said, adding that wages adjusted for inflation would only rebound to 2021 levels by the second quarter of next year.
The five institutes that contributed to the forecasts are the German Institute for Economic Research, the Ifo Institute, the Halle Institute for Economic Research, the Leibniz Institute for Economic Research and the Kiel Institute.
Source: Economy - ft.com
