Star Metro - German economy to shrink again in 2024: think tanks

Output in Europe's largest economy will decline by 0.1 percent this year, five think tanks said in a joint statement, after it shrank by 0.3 percent in 2023.

The new figure was a small but significant downgrade on the institutes' previous estimate of 0.1 percent GDP growth for 2024, made earlier this year.

"The German economy has been stagnating for more than two years," the institutes -- DIW, Ifo, IfW Kiel, IWH and RWI -- said in the joint statement.

"A slow recovery is likely to set in next year, but economic growth will not return to its pre-coronavirus trend for the foreseeable future," they said.

The institutes forecast growth to reach 0.8 percent in 2025, a downward revision on their previous estimate of 1.4 percent.

For 2026, they predicted the German economy to expand by 1.3 percent.

Germany, traditionally a driver of European growth, was the only major advanced economy to shrink in 2023 as it battled high inflation, an industrial slowdown and cooling export demand.

While inflation has slowly come down in 2024, a hoped-for recovery has failed to materialise between a continued industrial slowdown and weak demand in key market China.

Most recently, the economy underperformed analyst expectations in the second quarter, shrinking by 0.1 percent.

- 'Structural change' -

The factors weighing on the economy "will only gradually disappear", DIW's head of forecasting Geraldine Dany-Knedlik said at a press conference.

"The early indicators for the third quarter suggest that economic output will once again fall slightly," Dany-Knedlik said.

Besides the weak period for the global economy, Germany's problems were being impacted by "structural change", she said.

Decarbonisation and demographic factors as well as stronger competition from China were "dampening the long-term growth prospects", Dany-Knedlik said.

The effects were being felt particularly in Germany's key manufacturing industry, which was hard hit by the increase in energy costs following the Russian invasion of Ukraine in 2022.

The rise of competitors in China making high-quality goods for export is "displacing German exports on world markets", the institutes said.

This is particularly true in the case of Germany's flagship auto industry, which has struggled to keep up with upstart Chinese manufacturers in the field of electric vehicles.

The rise of Chinese competition and the loss of market share in China have precipitated a sense of crisis among German carmakers.

Volkswagen, Europe's biggest auto manufacturer, said earlier this month it would have to consider closing factories in Germany as it battles to stay competitive.

The grim outlook for certain sectors would not keep the German economy from once again finding the tentative path towards growth, the institutes said.

The "revival of private consumption" driven by rising real incomes would boost the economy in the coming quarters, they said.

"The upturn in key sales markets, such as neighbouring European countries, will support German foreign trade," providing additional forward momentum, they said.

The current economic slowdown had been felt on the labour market, with "slightly increased unemployment", the institutes said.

But as the economy picks up steam in 2025, they predicted, the unemployment figure "is likely to fall again".

F.T. Michaud--SMC