ifo Economic Forecast Summer 2024: New Hope, But Not (Yet) a Summer Fairytale – German Economy Slowly Working its Way Out of the Crisis
The German economy is slowly working its way out of the crisis. Price-adjusted gross domestic product will increase by 0.4% this year and by 1.5% next year. The inflation rate will fall noticeably from 5.9% in 2023 to 2.2% in 2024 and to 1.7% in 2025.
German Economy: No Summer Fairytale
The German economy tends to be on course for recovery. Sentiment among German companies has brightened since the start of the year. Although, according to the ifo economic surveys, most companies still rate the situation as poor, expectations regarding developments in the coming months have increased in all economic sectors. On the one hand, the gradual improvement in the climate in German sales markets and the resulting hope for a rise in new orders in manufacturing are likely to have contributed to that. On the other, energy costs for manufacturing companies have continued their downward trend and are now at the level of 2020. That will make production in Germany more profitable again, allowing companies to work off more of their still high order backlogs, and energy-intensive industries to expand their production again.
Overall, however, economic output in the second quarter will grow by 0.3% and hence only slightly faster than in the previous quarter. Manufacturing with its export business is bolstering the economy, while construction will probably continue its downward trend and suffer a strong setback. According to the available economic indicators, private consumption is likely to initially still stagnate. The European Football Championship being held in Germany will not change that either and will not bring about a summer fairytale for the German economy. That, at least, is what the experience of the 2006 World Cup suggests. Although sales in the hospitality and food retail sectors will pick up briefly during the Championship, domestic consumers will probably reduce their spending elsewhere, so that private consumption as a whole will likely remain unaffected. Only the export of services will benefit visibly, as this is where spending by foreign guests is felt.
The overall economic recovery will gather pace during the remainder of the year as consumer spending normalizes. The purchasing power of private households should continue to gain strength, and demand for goods and services should gradually recover. Wage dynamics will remain strong for the time being and inflation will fall below the 2% mark in the summer for the first time since March 2021. Although strong wage increases, particularly among service providers, are keeping price pressure high, the underutilization of capacity is currently limiting companies’ ability to pass that on, meaning that their profits in particular are likely to decline. The interest rate cut by the European Central Bank in June will probably be followed by two more this year. Lower interest rates, the stable labor market and strong income growth will give the consumer economy a boost and also gradually help construction back on its feet. It is assumed that consumer confidence will increase again, and the savings rate will gradually return to normal. Finally, industrial activity is also likely to continue its recovery and benefit from rising global demand.
Economic Slowdown Hampers Labor Market
The German labor market remains noticeably restrained but is in robust shape compared to overall economic development. In the first quarter of this year, the seasonally adjusted number of people in employment rose by 38,000 to 46 million, following an increase of 21,000 in the fourth quarter and a decline of 10,000 in the third quarter of 2023. The increase in employment in the first quarter of the year was therefore significantly lower than expected in the spring. However, this was mainly due to a significant downward revision of the employment figures for January and less to the unexpected weaker momentum in the subsequent months.
“"New hope is currently emerging. The German economy is slowly working its way out of the crisis."”
Inflation Is Gradually Normalizing
The rise in the consumer price index (CPI) has continued to slow in recent months. The inflation rate will fall noticeably from 5.9% in 2023 to 2.2% in 2024 and to 1.7% in 2025. The core inflation rate (in other words, the increase in consumer prices excluding energy) will be higher at 2.7% and 2.2% this year and next year respectively, as energy prices for consumers will keep on falling until the end of 2025.
Fiscal Policy: Restrictive Orientation
Fiscal policy is set to be restrictive this year and next. That is largely impacted by the expiry of various government measures implemented during the energy crisis of the past two years and the associated high inflation rates. The government’s financing deficit will fall from EUR 99 billion or 2.4% of nominal GDP in 2023 to EUR 54 billion or 1.2% of nominal GDP in 2025. Due to the introduction of the Generational Capital Fund and the associated annual allocations from loans from the German government, the debt level according to the Maastricht criteria will only fall slowly from 63.6% in 2023 to 63.3% of nominal GDP next year.
Economy Grows by 0.4%
All in all, price-adjusted gross domestic product will increase by 0.4% this year and by 1.5% next year. Compared to the ifo Economic Forecast from spring 2024, the growth rate for the current year has thus been raised by 0.2 percentage points. The growth rate for next year will still be as predicted. That means the gap to production potential should gradually close by the end of the forecast period and the economic situation should normalize. Growth in production potential is likely to fall from the current 0.8% per year to just 0.5% by the end of the decade, mainly for demographic reasons.
Key Forecast Figures for Germany
| 2023 | 2024 | 2025 | |
| Gross domestic product (percentage change over previous year) | -0.2 | 0.4 | 1.5 |
| Employment (1.000 persons) | 45,932 | 46,071 | 46,238 |
| Unemployment (1.000 persons) | 2,609 | 2,744 | 2,616 |
| Unemployment rate (in % of civilian labor force) | 5.7 | 5.9 | 5.6 |
| Consumer prices (percentage change over previous year) | 2023 | 2024 | 2025 |
| - Headline inflation | 5.9 | 2.2 | 1.7 |
| - Core inflation (excluding energy) | 6.0 | 2.7 | 2.2 |
| Unit labor costs (percentage change over previous year) | 2023 | 2024 | 2025 |
| - EUR billion | -99.1 | -72.8 | -54.4 |
| - in % of GDP | -2.4 | -1.7 | -1.2 |
| Balance on current account | 2023 | 2024 | 2025 |
| - EUR billion | 257.7 | 312.4 | 305.7 |
| - in % of GDP | 6.3 | 7.3 | 7.0 |
Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2024 to 2025: forecast by the ifo Institute.
© ifo Institute June 2024
Euro Area and Global Economy
The economy in the euro area picked up noticeably in the first quarter. Inflation has fallen significantly in recent months. It is expected to fall below 2% by the end of 2024. Inflation should then average 2.3% in the current year and decline further to an annual average of 1.6% in 2025. The economy is likely to accelerate noticeably in the summer half-year. One contributing factor is that real incomes are continuing to rise. However, the easing of monetary policy and the upturn in global trade will also bolster demand, even if export and investment demand probably only increases in buoyancy toward the end of the year. All in all, overall economic production in the euro area will only grow by just under 1% in 2024. In 2025, the upturn in economic momentum should then be reflected in growth of just under 2%.
In China, the pace of expansion is likely to slow somewhat in the summer half-year. The strong inventory buildup at the start of the year will probably lead to lower demand for industrial goods. Consumer demand should also remain weak due to the ongoing problems. However, Chinese goods exports are expected to increase significantly as global industrial production picks up again. On the whole, overall economic production in China will probably rise by 4.8% in 2024 and by 4.2% in 2025.
In Japan, automotive production in the spring will likely compensate for the losses at the beginning of the year. However, higher key interest rates from the fall onward will curb companies’ willingness to invest. Overall economic production in Japan should hardly expand in the current year and is expected to increase by 1% next year.
In the US, private consumption will continue to sustain demand, although its growth will not be as strong as in the previous year. However, investments are likely to gain momentum at the end of the year. Residential construction will also continue to increase in the forecast period. However, it is to be expected that fiscal policy will take a more cautious course in view of the high budget deficit. Consumer prices should rise by 3% in 2024 and by just under 2.5% in 2025. Overall economic production will expand by 2.2% in 2024 and hence less strongly than in the previous year. In 2025, gross domestic product is expected to increase by 1.8%.
All in all, overall global economic production is likely to grow by 2.5% in both 2024 and 2025. Global trade, which declined in the previous year, will probably increase by around 1.5% in the current year and by just under 3% next year.
Risks
- Ukraine war
- War in the Middle East
- Real estate crisis in China
