Joint Economic Forecast Spring 2024: Headwinds from Germany and Abroad – Institutes Revise Forecast Significantly Downward

Development in Germany

The economy in Germany is struggling. A phase of economic weakness that has persisted until recently is accompanied by dwindling growth forces. Economic and structural factors are therefore overlapping in the sluggish overall economic development. Although a recovery is likely to set in from the spring, the overall momentum will not be too strong.

Economic output is currently at a level that is barely higher than before the pandemic. Since then, productivity has been stagnating, and the fact that the number of people in employment has now increased by over 600,000 essentially only compensates for the lower average number of hours worked. However, the continued sharp rise in the sickness rate compared to the trend also plays a role here. If, as the institutes assume, this decreases by the end of next year, a 1.5% higher volume of work will be available again.

The increase in economic output expected by the institutes last fall for the winter half-year did not materialize, even though private consumption proved to be slightly supportive. There were more headwinds than tailwinds from both international and domestic markets. German exports fell, while global economic activity was rising until recently. This is primarily because demand for capital goods and intermediate goods, which are important for German export companies, remained weak. Price competitiveness has also suffered, particularly for energy-intensive goods, and production has moved abroad.

The institutes continue to assume that the relationship between global trade and global production will gradually normalize. In the course of a stronger synchronization, the sales prospects for German exporters should also brighten, particularly in the goods categories that are important to them. However, this is not expected to provide the economy with impetus before the middle of the current year. While this year will be dominated by consumption-related upward forces, with a robust labor market also contributing to this, next year the economy will increasingly be driven by international business.

All in all, the institutes have revised their forecast for the change in gross domestic product in the current year significantly downward by 1.2 percentage points to 0.1% compared to their fall report. The forecast for the rate in the coming year remains almost unchanged at 1.4% (down by 0.1 percentage points), but is accompanied by a reduction in the volume of economic output of over EUR 30 billion. The values for the annual average change overstate the differences in economic momentum between the two years, which are less pronounced at 1.0% and 1.5% according to the respective development rates. Nevertheless, the recovery is now shifting more strongly into the coming year.

Cautious Reform of the Debt Brake

In economic policy terms, the institutes recommend a cautious reform of the debt brake. In principle, they support the proposal put forward by the German Bundesbank and suggest that after a macroeconomic emergency, for which the exception clause has been activated, the transition to a regular deficit limit should no longer be abrupt, but rather gradual. Such a rule-based reset would take account of the economic aftermath of adverse shocks and would also have a stabilizing effect by improving the predictability of fiscal policy.

However, a redesign of the financial constitution would be more important than an expansion of the government’s overall debt capacity. This should aim to shield municipal investments, which account for a good 40% of total public investment, from short-term budget shortfalls and allow economic fluctuations to affect only the federal and state governments. Local authority revenues could be made less sensitive to cyclical fluctuations, for example by increasing the rate of income tax instead of trade tax. To ensure that such a radical financial reform does not fail due to the fiscal imponderables of individual financial years, an exception to the debt rule should be permitted on a transitional basis when it comes into force.