ifo Economic Forecast Spring 2024: German Economy Paralyzed

In Germany, meanwhile, economic output stagnated in the past summer half-year and even fell by 0.3 percent in the final quarter of 2023. Value added in manufacturing and construction contracted particularly sharply. Reasons included the lack of orders, the snowy December, and an exceptionally high sickness rate.

The only factor supporting the economy was private consumption. Inflation has been falling rapidly for a year now, reaching its lowest level since June 2021 at 2.5 percent in February. At the same time, wage incomes are rising at a fast rate.

Following the German Federal Constitutional Court’s budget ruling in November 2023, fiscal policymakers adopted a federal budget for the current year at the beginning of the year, tightening its restrictive course: companies and households will be burdened more or relieved less, and government spending will be cut.

Forecast for the German Economy

The leading indicators currently available do not point to an economic turnaround at the start of 2024: a deteriorating order situation in all economic sectors, low order backlogs, high sickness rates, ongoing strikes.

All in all, economic output is likely to continue its decline in the current quarter and fall by 0.1 percent compared to the previous quarter. A noticeable overall economic recovery is not expected until the second half of the year. Overall, price-adjusted gross domestic product will increase by only 0.2 percent this year compared to the previous year. Next year, economic output will then increase by 1.5 percent. The growth forecast for the current year has thus been significantly lowered by 0.7 percentage points compared to the ifo Economic Forecast Winter 2023 and raised slightly by 0.2 percentage points for 2025. Contrary to expectations, the German economy is in recession in the winter half-year 2023/24. In particular, a recovery in industrial activity will not set in until later.

Economic weakness will slow down employment growth and initially cause unemployment to rise further. The unemployment rate will average 5.9 percent this year, 0.2 percentage points higher than in 2023. The rate is not expected to fall back to 5.6 percent until 2025.

The inflation rate will continue to fall from an average of 5.9 percent last year to 2.3 percent this year and 1.6% percent next year. Gas and electricity prices in particular will become cheaper for consumers. The energy component is therefore likely to bring down inflation in the forecast period. The core inflation rate (i.e., the increase in consumer prices excluding energy) will decline more slowly and, at 2.8 percent this year and 2.2 percent next year, will be higher than the overall inflation rate. Inflation among labor-intensive service providers in particular will fall only slowly because rising wage costs are keeping up the pressure on prices.

Germany’s budget deficit will fall to 1.8 percent and 1.0% percent of economic output this year and next year, respectively, down from 2.1 percent this year. The current account balance will fall to 6.6 percent of economic output by 2025.

Key Forecast Figures for Germany

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2024 to 2025: forecast by the ifo Institute.
© ifo Institute Mar. 2024

Risks to the Forecast

The risks to this forecast are manifold. In particular, the further development of energy prices is a source of great uncertainty. To date, it has been assumed that prices for crude oil, electricity, and natural gas will develop in line with prices on the futures markets during the forecast period. Accordingly, the most recent price declines are set to continue and prices will settle only just above the level seen in the years before the Covid crisis. Industrial activity and consumer spending should benefit from this. However, the further course of events depends crucially on geopolitical circumstances, which can change at any time and therefore have a significant impact on the economic development of the German economy.

The current economic and financial policy poses a further significant risk. It is true that an agreement was reached for the current year’s budget and compliance with the debt brake should be guaranteed. However, against the backdrop of the current budget situation and, above all, in view of the anticipated further difficult negotiations on the 2025 federal budget, it is not unlikely that urgently needed reforms will be put on the back burner or tackled only hesitantly. This standstill and the uncertainty surrounding important economic policy decisions are paralyzing the economy and hampering long-term growth, as spending on investment and consumption is being held back. If, contrary to the assumptions made in this forecast, the uncertainty does not dissipate, the expected recovery is likely to recede further into the future.