ifo Economic Forecast Autumn 2024: German Economy is Stuck in Crisis

Forecast for the German Economy

The leading indicators currently available do not indicate any economic turnaround for the third quarter of 2024. The ifo Business Climate deteriorated for the third time in a row in August, and the order situation is still considered to be poor in all sectors of the economy. A gradual recovery is not expected until next year. Nevertheless, incoming orders in construction and manufacturing have not fallen any further recently. Export business is supported by the growth of the global economy, which is likely to maintain its current momentum with rates of between 0.5 percent and 0.6 percent per quarter in the forecast period. However, the poor competitive situation is likely to continue to weigh on export-oriented companies in the manufacturing sector. Although lower energy costs have improved the situation somewhat in the past 12 months, German companies nevertheless assess their competitive situation in both European and non-European markets as significantly worse than companies in other European countries. In the coming year, construction activity will be driven primarily by public construction. Residential construction is likely to stagnate for the time being, as newly constructed houses has hardly become more affordable. While interest rates on loans have once again fallen significantly since July, there has been only little reduction so far in price for newly constructed residential real estate. The residential construction economy will not pick up again until real income rises. As wages rise significantly faster than prices in the remainder of the forecast period, purchasing power will continue to return, which should also lead to a recovery in consumer spending.

All in all, economic output is likely to remain unchanged in the current quarter and only increase slightly by 0.2 percent compared to the previous quarter by the end of the year. The price-adjusted gross domestic product will therefore probably stagnate this year. A gradual recovery is likely to set in over the next two years, with economic output increasing by 0.9 percent and 1.5 percent respectively. Compared to the ifo Economic Forecast Summer 2024, the growth forecast compared to the ifo Economic Forecast Summer 2024 has been significantly lowered by 0.4 percentage points for this year and by 0.6 percentage points for 2025. Contrary to expectations, industrial activity and consumer spending are only managing to emerge very slowly from their stagnation. Economic output growth in 2026 is overstated due to the high number of working days. Adjusted for calendar effects, growth in price-adjusted gross domestic product is only 1.2 percent.

The weak economy will slow down the increase in employment and initially cause unemployment to rise further. The unemployment rate will average 6.0 percent this year, 0.3 percentage points higher than in 2023. In the two following years, the rate is likely to fall again to 5.8 percent and 5.3 percent respectively as the gradual recovery and the persisting pronounced shortage of labor continue. However, employment will then only increase slightly. Demographic change is making itself felt here and will lead to a decline in labor force potential from next year. Accordingly, the growth rate for potential output will also fall significantly to just 0.4 percent by the end of the decade.

The inflation rate will continue to decline, from an average of 5.9 percent last year to 2.2 percent this year and 2.0 percent and 1.9 percent respectively in the next two years. Energy in particular will be cheaper for consumers in the coming months than in the previous year. The energy component is therefore likely to dampen inflation into the coming year. The core inflation rate, in other words, the increase in consumer prices excluding energy, will fall more slowly and be above the overall inflation rate in this year and the next at 2.7 percent and 2.3 percent respectively. Inflation in labor-intensive services in particular will only fall slowly, as rising wage costs are keeping price pressure high. In 2026, the core inflation rate is likely to then fall to 2.0 percent and thus to the ECB’s inflation target.

In mid-July, the German government agreed on a comprehensive growth initiative with 49 measures, which it hopes will provide a noticeable boost to potential output. Only a few points of the growth initiative were taken into account in this forecast, as there are still no concrete legislative initiatives for most of the measures. The measures taken into account include, in particular, the tax relief from the Tax Development Act (“Steuerfortentwicklungsgesetz”), of which the adjustment of the income tax rate for private households is likely to have the greatest impact. However, this relief of a similar magnitude was already taken into account in the previous forecasts. Other measures, such as reducing electricity tax for companies in manufacturing, were also already included in earlier forecasts, but will now be extended beyond 2025. In addition, companies will receive relief through amended depreciation rules and expanded research funding, although these are not expected to take effect until 2026. Overall, the deficit in the general government financial balance this year and next year will be slightly higher than expected in the summer at 2.0 percent and 1.3 percent of economic output respectively. This is mainly due to the weaker economic development. In 2026, the fiscal deficit should then fall to 0.9 percent of economic output.

Key Forecast Figures for Germany

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2024 to 2025: forecast by the ifo Institute.
© ifo Institute Sept. 2024

Risks for the Forecast

• Energy prices
• Savings rate
• Structural changes