Economic institutes lower economic forecast

In their spring report, the German Institute for Economic Research Berlin, the ifo Institute Munich, the Kiel Institute for the World Economy, the Leibniz Institute for Economic Research Halle and the RWI - Leibniz Institute for Economic Research have revised their forecast for the current year significantly downwards. They now only expect economic output to grow by 0.1%. In the fall report, they were still forecasting 1.3 percent. For the coming year, they are leaving the forecast virtually unchanged at plus 1.4 percent (previously 1.5 percent). However, economic output will then be over 30 billion euros lower due to the delayed recovery.

Weak economic phase, dwindling growth forces

According to the report, a phase of economic weakness that has persisted until recently is accompanied by dwindling growth forces. Economic and structural factors are 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 great. "In the current triad of a sluggish economy, paralyzing politics and suffering growth, only the economic tone is changing from minor to major," says Stefan Kooths, Head of Economic Research at the Kiel Institute for the World Economy (IfW Kiel).

In the current year, private consumption will become the most important driving force for the economy, followed by an increase in foreign business in the coming year. Economic output is currently at a level that is barely higher than before the pandemic. Since then, productivity in Germany has been treading water. There has recently been more of a headwind than a tailwind from both foreign and domestic markets.

Private consumption picked up later and less dynamically than previously expected by the Joint Economic Forecast Project Group. German exports declined despite rising global economic activity, primarily because demand for capital and intermediate goods, which are important for Germany, was weak and price competitiveness for energy-intensive goods suffered.

Ongoing uncertainty about economic policy is weighing on corporate investment, which is likely to remain at the 2017 level despite the expected upturn in the coming year.

According to the forecast, effective earnings are expected to increase by 4.6% and 3.4% in 2024 and 2025 respectively. This means that real wages will increase over the entire forecast period and slowly make up for the losses from 2022 and the first half of 2023. However, the level seen at the end of 2021 - i.e. before the drastic surge in inflation - is not expected to be reached until the second quarter of 2025.

Overall, the institutes expect consumer prices to rise by 2.3% in the current year and by 1.8% in the coming year. Adjusted for the dampening effect of energy prices, core inflation rates are 2.8% (2024) and 2.3% (2025).

Labor market

A robust labor market is supporting consumption-related upward forces. Although real unit labor costs are rising again significantly in the wake of wage increases, they remain employment-friendly. Unemployment is likely to rise only slightly and fall again from the spring. The institutes are forecasting annual unemployment rates of 5.8% (2024) and 5.5% (2025).

The deficits in the general government budget in relation to economic output will fall from 2.1% in the previous year to 1.6% (2024) and 1.2% (2025). At 47.5% and 48.4%, the public sector revenue ratio will reach record levels for Germany as a whole in the two forecast years. In terms of economic policy, the institutes recommend a cautious reform of the debt brake based on the German Bundesbank's proposal, which allows for more debt-financed investments than before. They also suggest that the deficit limit should no longer be tightened abruptly after the exception clause is withdrawn, but rather gradually. More important, however, is a reorganization of the state financial constitution in order to better shield municipal investment activity - a good 40 percent of total public investment - from cyclical budget shortfalls.