As a continuation of last week’s topic, today’s article focuses on the 2025 economic forecast for Germany.

Germany, long regarded as Europe’s economic powerhouse, faces a challenging period marked by stagnation, structural adjustments, and persistent headwinds. The economic activity was forecasted to decline by 0.1% in 2024, making it the second consecutive year of negative growth after a 0.3% contraction in 2023. The country’s economy is grappling with weak consumption, subdued investment, and a deteriorating trade outlook as global demand for industrial goods wanes.

Despite these challenges, there are signs of recovery on the horizon. Domestic demand, driven by rising real wages and easing inflation, is expected to support a gradual economic rebound. Growth is projected to reach 0.7% in 2025 and 1.3% in 2026. However, structural hurdles and geopolitical uncertainties continue to cloud Germany’s long-term prospects.

Economic Stagnation and Weak Growth

The German economy contracted by 0.2% in the first half of 2024 compared to the same period in 2023. This stagnation reflects weak domestic and foreign demand for manufacturing goods, reduced investment in equipment, and a construction sector hampered by labour shortages and low demand. Private consumption has also struggled to drive growth, despite increases in real disposable income.

Encouragingly, household consumption is estimated to have rebounded in the third quarter of 2024, alongside increased government spending. Real GDP rose by 0.2% quarter-on-quarter during this period. Nevertheless, overall economic output for 2024 is expected to decline, underscoring the challenges of sustained recovery.

Recovery Drivers: Domestic Demand and Investment

Easing inflation is projected to boost real household income, supporting a moderate recovery in private consumption. Additionally, lower financing costs from looser monetary policy are expected to stimulate investment. The construction sector, which has struggled in recent years, is set to resume growth in early 2025, driven by rising demand for housing and infrastructure.

Tax incentives announced in mid-2024 are anticipated to bolster investment in equipment, further aiding recovery. By 2025, domestic demand is expected to emerge as the primary driver of economic growth. However, high energy costs are likely to continue weighing on energy-intensive industries, limiting Germany’s export competitiveness.

Inflation Trends and Fiscal Stability

Inflation has eased significantly, with the Harmonized Index of Consumer Prices (HICP) falling to 2.4% in October 2024, down from a peak of 11.6% in October 2022. Energy prices, a major contributor to inflation, are expected to decline further in 2025, bringing inflation down to 2.1% in 2025 and 1.9% in 2026.

On the fiscal front, the government deficit is projected to decrease from 2.6% of GDP in 2023 to 2.2% in 2024 and further to 2.0% in 2025. Rising revenues from employment and tax reforms, coupled with the phase-out of energy price subsidies, are expected to stabilize public finances. Government debt is forecast to remain steady at around 63% of GDP over the forecast period.

Labor Market Challenges

Germany’s labour market has shown signs of strain amid economic stagnation. From January to September 2024, job vacancies fell by 23% year-on-year, and the unemployment rate rose to 3.5%. Despite these setbacks, the labour market is expected to stabilize as economic growth resumes and real wages continue to rise.

Structural and Geopolitical Risks

Germany faces significant structural challenges, including the decarbonization of its economy, digital transformation, and demographic shifts. The automotive industry, a cornerstone of the German economy, has lost global competitiveness, particularly in the electric vehicle market, where Chinese and U.S. manufacturers have gained ground.

Geopolitical tensions and rising protectionism, particularly from the United States, pose additional risks. Potential tariffs and trade policy uncertainty could further dampen Germany’s export-driven economy.

A Path Forward

Germany’s economic recovery depends on decisive reforms to address structural challenges. These include reducing corporate tax burdens, investing in infrastructure, and addressing labour shortages through immigration and workforce participation policies. Without these measures, the country risks prolonged stagnation and falling behind its European peers. While growth is expected to resume gradually, the road ahead remains fraught with challenges.

References

Cingari, P. (2024, December 24). Five major economic hurdles Germany needs to overcome in 2025. Retrieved from EuroNews: https://www.euronews.com/business/2024/12/24/five-major-economic-hurdles-germany-needs-to-overcome-in-2025

European Commission. (2024, November 15). Economic forecast for Germany. Retrieved from European Commission: https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/germany/economic-forecast-germany_en

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