German economic institutes cut 2024 growth forecast to 0.1%

A group of leading economic think tanks released their six-monthly "collective diagnosis" of the German economy for early 2024 on Wednesday. 

Titled "German economy ailing — reforming the debt brake is no cure-all," the report revised 2024 growth forecast down from 1.2% to near-stagnation, at 0.1% for the year. 

"Germany's economy is struggling. A phase of economic weakness that has persisted until recently is accompanied by dwindling growth forces. Both economic and structural factors are therefore overlapping in the sluggish overall economic development," the report's summary said.

It predicted that the situation would start to improve soon, but also warned that this dynamic would not be "all that great" overall. 

The report said that consumers and their recovering purchasing power, as inflation slows and as wages rise in many sectors, would be "the most important fuel for the economic recovery." 

Faltering exports, particularly for Germany's speciality, high-end goods 

The so-called "collective diagnosis" is compiled in collaboration between a series of leading German economic institutes: the DIW in Berlin, the IfW in Kiel, the IWH in Halle, the RWI in Essen, and Ifo in Munich. 

The report said that both internationally and domestically there had been "more headwinds than tailwinds." German export figures were dropping, despite an economic recovery internationally following the disruption from the COVID pandemic and then Russia's invasion of Ukraine. 

It attributed this primarily to still-weak demand for capital and intermediate goods — equipment like specialist machinery used in turn to produce consumer goods. Purchasing such equipment often involves high outlays and only longer-term rewards, often leading companies eschew such investments in more difficult periods.

It also said the price competitiveness had suffered for energy-intensive goods made in Germany, given the continued but reduced strain on electricity prices and also the outsourcing of some production. 

It predicted gradual improvement on this front, albeit "not before the second half of the year," but also said that by 2025, international trade would again become the key driver of growth, with the focus more on domestic consumption this year.

The think tanks' predicted growth for 2025, meanwhile, was almost unchanged — revised to 1.4% from 1.5%. However, the report noted how this reduction was also accompanied by a lower anticipated baseline for 2024.

The report also said it anticipated reductions in both central bank interest rates and short-term loan interest rates in the relatively near future. Even though it did not anticipate major changes in longer term rates like mortgages, it still predicted a recovery in the housing market given how prices had fallen of late. 

Government also forecasting difficult 2024, but a return to slight growth

The German government also revised its economic forecasts downwards a few weeks ago, warning of the likelihood of entering a technical recession by the end of the first quarter of 2024.

German GDP contracted by 0.3% year-on-year in the last quarter of 2023, with two consecutive quarters of negative growth deemed by most to constitute a technical recession.

One additional contributing factor in recent months has been the frequent strikes impacting both the rail network and air travel in Germany, which can have knock-on downsides for other sectors impacted by canceled planes and trains. 

However, one of the larger labor disputes, between national rail operator Deutsche Bahn and the GDL train drivers' union, was solved earlier this week with a breakthrough deal after months of acrimonious negotiations. 

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msh/wmr (AFP, dpa, Reuters)