Germany: economic growth forecast 2024
To continue on a similar topic to last week’s article, today’s article aims to present the expectations of the German experts regarding the economic growth forecast for 2024.
Economic activity in Germany experienced a contraction of 0.3% in 2023, as forecasted in autumn. This downturn was chiefly attributed to a decline in private consumption due to reduced purchasing power. Factors such as high building and borrowing costs, coupled with labor shortages and elevated energy prices, further dampened investment in construction and energy-intensive sectors.
Sentiment indicators remain subdued, with some hitting their lowest levels since the COVID-19 crisis in January, suggesting sluggish economic growth in the first half of 2024. Investment growth is anticipated to remain neutral compared to pre-pandemic levels, influenced by cautious investor sentiment at the beginning of the year. Persistent labor shortages continue to hinder economic activity, while prospects for a trade-led recovery appear slim, with exports and imports expected to grow at similar rates in the forecast years. Additionally, tighter fiscal policies are projected to curb short-term growth prospects.
At the onset of the year, the head of Germany's financial regulatory body cautioned that 2024 would likely see diminished bank profits and highlighted escalating risks in the real estate sector, issuing heightened alerts amidst Europe's largest economy grappling with its most significant property crisis in decades. While Germany's financial watchdog, BaFin, has consistently flagged risks in the previously buoyant property market, the president's remarks in a podcast and a separate BaFin report conveyed a notably gloomier outlook as the industry contends with elevated interest rates, bankruptcies, and a pronounced deceleration in transactions.
Projections from the DIW research institute indicate that spending in Germany's construction sector is poised to contract in 2024, marking the first downturn since the 2009 financial crisis, representing a stark reversal from the prolonged upward trajectory observed in recent years. The challenges faced by developers and real estate firms have led to declining prices and a significant slowdown in transactions, a trend BaFin warned may persist.
However, there are some positive developments. Market financing conditions have moderately eased, with further improvement expected through bank lending channels. Additionally, real incomes are forecasted to benefit from a robust labor market and increasing real wages, supporting private consumption over the forecast period. Overall, real GDP is expected to grow by 0.3% in 2024, marking a downward revision from the 0.8% projected in the Autumn Forecast, while the forecast for 2025 remains unchanged at 1.2%.
HICP inflation decelerated from its peak of 11.6% in October 2022 to 6.0% in 2023 and further to 3.1% in January 2024. This reduction can be attributed to the decrease in wholesale energy prices and the discontinuation of energy support measures in November 2023. HICP inflation is forecasted to reach 2.8% in 2024 and 2.4% in 2025, aligning with the Autumn Forecast. Inflation in both years is expected to be primarily driven by the services sector, with wage growth temporarily contributing to inflation, as previously anticipated in the Autumn Forecast 2023. Conversely, energy price growth is anticipated to have a minimal impact on inflation moving forward.
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During a press conference, the German minister attributed the adjusted forecast to the unstable global economic climate and sluggish growth in global trade, compounded by rising interest rates. The foremost challenge facing Germany is the shortage of skilled labor, a problem expected to escalate in the coming years.
References
European Commission . (2024, February 15). Economic forecast for Germany. Retrieved from European Commission : https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/germany/economic-forecast-germany_en
Kiderlin, S. (2024, February 21). Germany slashes 2024 growth forecast to just 0.2% as economy in ‘tricky waters,’ minister says. CNBC.
Sims, T., & Siebelt, F. (2024, January 23). German regulator steps up warnings on property as industry reels. Reuters.