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Construction site in Schleswig-Holstein: Germany is standing still

Photo: Christian Charisius / picture alliance / dpa

Germany's economy is ailing. In their spring report, the five leading economic research institutes have significantly revised their forecast for the current year downwards. They now only expect economic output to grow by 0.1 percent. In the fall they had assumed that gross domestic product would increase by 1.3 percent in 2024. The researchers spoke of “headwinds” for the German economy from at home and abroad. According to the institutes, a tough phase of economic weakness is accompanied by dwindling growth forces.

The federal government expects growth of 0.2 percent this year. In 2023, economic output fell by 0.3 percent.

According to the researchers, it looks like there will be an upswing in the coming year - even if they scale back their forecast from 1.5 to 1.4 percent. Economic output will be over 30 billion euros lower in 2025 as a result of the delayed recovery.

Slight recovery expected from spring

"In the current triad of sluggish economic activity, paralyzing politics and suffering growth, only the economic tone changes from minor to major," says Stefan Kooths, head of economic activity at the Kiel Institute for the World Economy (IfW Kiel). Although a recovery is likely to begin in the spring, the overall momentum will not be too great.

Economic performance is currently at a level that is barely higher than before the pandemic. “Since then, productivity in Germany has stalled,” says the spring report. Continuing uncertainty about economic policy is putting a strain on companies' investments, which are likely to remain at the 2017 level despite the expected recovery in the coming year.

In the current year, private consumption is becoming the most important driving force for the economy, the researchers write. The positive news for employees: their real wages are likely to increase both this year and next. However: "The level at the end of 2021 - i.e. before the drastic surge in inflation - will probably only be reached in the second quarter of 2025," it said in a restrictive way about real wages.

In the coming year, foreign business will increasingly contribute to growth.

Inflation will probably continue to fall

According to the report, the inflation rate is expected to fall to 2.3 percent this year and to 1.8 percent next year. In 2023 it was still 5.9 percent. The European Central Bank (ECB) is aiming for a value of two percent in the monetary union.

According to experts, unemployment is only likely to increase slightly and will fall again from spring onwards. Over the year, the institutes forecast unemployment rates of 5.8 (2024) and 5.5 percent (2025).

Debt brake reform “not a panacea”

The institutes recommend a careful reform of the debt brake. It makes sense to give yourself more time to return to compliance with the debt brake after an emergency, said IfW economist Kooths.

However, a reform of the debt brake is "not a panacea for solving the problems," emphasized Oliver Holtemöller from the Leibniz Institute for Economic Research Halle (IWH). The debt brake is already carrying out its basic task, namely stabilizing public finances, even if smaller changes could make sense. However, there is no strong evidence that the strict debt rules are actually slowing down Germany's economic development.

Instead, the researchers identified demographics and the shortage of skilled workers, inadequate digitalization in many areas and the transformation of the economy towards climate-friendly production as the most important areas of action for economic policy. “We have major problems in all of these areas,” said Holtemöller.

The German Institute for Economic Research in Berlin, the Kiel Institute for the World Economy, the Leibniz Institute for Economic Research in Halle, the Leibniz Institute for Economic Research in Essen and the Ifo Institute in Munich are involved in the so-called joint diagnosis.

The joint diagnosis serves the federal government as a basis for its own projections, which in turn form the basis for the tax estimate.

mmq/dpa