Economic activity in Germany is expected to decline by 0.1% in 2024. High uncertainty has been weighing on consumption and investment, and the trade outlook has worsened as global demand for industrial goods weakened. Going forward, domestic demand is set to pick up, driven by increases in real wages. This is expected to support a recovery in GDP growth to 0.7% in 2025 and 1.3% in 2026. The government deficit is projected to decrease and the government debt ratio to stabilise around 63% of GDP.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,1 | 0,7 | 1,3 |
| Inflation (%, yoy) | 2,4 | 2,1 | 1,9 |
| Unemployment (%) | 3,3 | 3,3 | 3,4 |
| General government balance (% of GDP) | -2,2 | -2,0 | -1,8 |
| Gross public debt (% of GDP) | 63,0 | 63,2 | 62,8 |
| Current account balance (% of GDP) | 7,1 | 6,8 | 6,5 |
Economic growth is set to resume gradually
The German economy continues facing headwinds throughout 2024. In the first half of the year, it contracted by 0.2% compared to the first half of the previous year. Weak domestic and foreign demand for manufacturing goods, combined with high uncertainty, impacted investment in equipment. In addition, the construction sector was dragged down by labour shortages and weak domestic demand. Amidst low consumer sentiment, the saving rate increased. Private consumption thus did not support economic growth, despite an increase in real disposable income. Household consumption is however estimated to have rebounded in the third quarter of 2024. Together with a further increase in government consumption, this is estimated to have lifted real GDP by 0.2% compared to the previous quarter. Overall, real GDP is expected to contract by 0.1% in 2024. Following a decline of 0.3% in 2023, this would be the second year in a row with negative growth.
With an expected further easing of inflation, real household income is set to continue to recover. Private consumption is thus expected to continue increasing, albeit at a slow pace. Easing of monetary policy and the associated lower financing costs are projected to support a recovery in investment over the forecast horizon. Construction is set to resume growth in early 2025, underpinned by recovering demand for housing and infrastructure, as already signalled by rebounding orders as well as mortgage loans. In response to the increase in tax incentives for investment in 2025 announced in July 2024, investment in equipment is expected to rebound. Overall, domestic demand is forecast to become again the main driver of economic growth in 2025 and 2026. As energy costs are expected to remain significantly above pre-pandemic levels, they are set to continue weighing on the cost-competitiveness of energy-intensive industries. The contribution to growth from net exports is thus projected to be slightly negative in 2025 and broadly neutral in 2026, despite improvement in demand from Germany’s main trading partners. The current account surplus is expected to remain elevated, but still below pre-pandemic levels. Overall, growth is forecast to increase to 0.7% in 2025 and to 1.3% in 2026.
Economic stagnation leaves its mark on the labour market
From January to September 2024, the labour market deteriorated slightly as economic output stagnated. Labour demand weakened and the number of vacancies fell by 23% y-o-y to 1.3 million in 2024-Q2. As employment growth flattened, the unemployment rate increased by 0.5 pps y-o-y to 3.5% by September 2024. The deterioration of the labour market is expected to be contained as economic growth resumes and ageing continues to weigh on labour supply. Nominal wage growth has been decelerating, but as inflation fell more, real compensation increased by 2.3% y-o-y in 2024-Q2. Real wages are projected to continue to increase steadily in the short term.
Inflation to ease further
HICP inflation declined and stood at 2.4% in October 2024, down from a peak of 11.6% in October 2022, primarily due to falling energy prices. For 2024, inflation is projected to average 2.4%. Energy prices are forecast to come down further in 2025 from elevated levels in 2024, pushing overall inflation lower. In 2026, with wholesale energy prices stabilising and the CO2-price adjustments, energy prices are no longer set to drive inflation down. Services inflation - the largest contributor to inflation - is expected to slow down only modestly over the forecast horizon, due to sustained wage growth. Overall, inflation is projected at 2.1% in 2025 and 1.9% in 2026.
Stabilising debt level
In 2024, the general government deficit is projected to decrease to 2.2% of GDP, from 2.6% in 2023. This decline is supported by the phase-out of measures introduced in 2022 to mitigate the impact of high energy prices, notably the price brakes for gas and electricity tariffs, which were estimated at around 1.0% of GDP in 2023. At the same time, more spending is expected to come from the extra-budgetary fund for defence.
In 2025, the government deficit is projected to decrease further to 2.0% of GDP. Stable employment and rising wages, as well as the phase-out of the tax-free bonus to compensate households for the high inflation of the last years, will support revenue from income tax and social contributions. Planned increases in the social contribution rates for healthcare and long-term care will also play a role. These increases in revenue are in a large part expected to be offset by a continuously increasing expenditure, including social and defence spending. In 2026, the government deficit is forecast to decrease to 1.8% of GDP. Overall, the fiscal stance is set to turn broadly neutral in 2025 and 2026, from being contractionary in 2024.
Government debt stood at 62.9% of GDP at the end of 2023 and is expected to remain around 63% over the forecast horizon. This can be explained by several factors, including low economic growth on the back of receding inflation, and extra spending exhausting the borrowing limits of the debt brake. The expected stabilisation of the debt level can also be attributed to the use of the extra-budgetary fund for defence, or to the debt-financed and debt-increasing building up of a capital-based pillar in the pension system.