Economic activity in Germany is expected to decline by 0.3% in 2023. A loss in purchasing power due to high inflation and the tightening of financing conditions are weighing on consumption and investment. Moreover, foreign demand has evolved less favourably than previously assumed, resulting in a worsened trade outlook. However, going forward, domestic demand is set to pick up, driven by a real wage increase. Together with recovering foreign demand, this is expected to support a pick-up in GDP growth to 0.8% in 2024 and 1.2% in 2025. Public finances are entering a path of fiscal consolidation with gradually decreasing government deficits and debt-to-GDP ratios, also supported by less-costly-than-anticipated measures to mitigate the impact of high energy prices.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0,3 | 0,8 | 1,2 |
| Inflation (%, yoy) | 6,2 | 3,1 | 2,2 |
| Unemployment (%) | 3,1 | 3,2 | 3,2 |
| General government balance (% of GDP) | -2,2 | -1,6 | -1,3 |
| Gross public debt (% of GDP) | 64,8 | 63,6 | 62,7 |
| Current account balance (% of GDP) | 6,0 | 6,5 | 6,5 |
Economic growth is set to resume gradually
The German economy has been facing headwinds throughout 2023. Industrial production continued its decline in the third quarter after an already weak first half of the year. Losses in purchasing power due to high inflation have negatively impacted private consumption. In addition, export volumes decreased as the economic situation in Germany’s main trading partners weakened. As a result, economic activity is estimated to have declined by 0.1% in the third quarter. Overall, real GDP is expected to contract by 0.3% in 2023.
As inflation continues to ease and real disposable household income increases, investment and private consumption are expected to recover to their pre-pandemic levels over the forecast horizon. Construction is set to resume growth during the second half of 2024, supported by high housing demand. At the same time, energy costs are expected to remain elevated, preventing a more dynamic recovery, particularly in energy-intensive industries. With demand from Germany’s main trading partners stabilising, the contribution from net trade is projected to be broadly neutral in 2024 and mildly positive in 2025. Germany is expected to see an increase in current account surpluses towards 6.5% over the forecast horizon. Overall, growth is forecast to increase to 0.8% in 2024 and to 1.2% in 2025.
A slightly softening labour market
Employment rose by 0.8% in the first eight months of 2023 compared with the same period last year. A record-high 83.9% of the population aged 20-64 is active on the labour market, up from 83.3% a year before. The unemployment rate has been broadly stable at around 3% and is expected to increase only slightly to 3.2% over the forecast horizon. At the same time, the job vacancy rate has been receding, albeit remaining at high levels. Even if softening somewhat, the labour market is expected to remain tight as ageing continues to weigh on labour supply. In the first half of 2023, wages were 6.1% higher than a year before, still resulting in real wage losses. Benefiting from higher wage outcomes, real wage growth is set to have resumed in the second half of 2023 and is expected to continue in 2024 and 2025.
Inflation to ease further
Annual HICP inflation decelerated steadily over the past year to 4.3% in September 2023, down from the 11.6% peak in October 2022. This reduction was mainly driven by the decline in wholesale energy prices and the introduction of energy measures. For 2023 as a whole, HICP inflation is expected to reach 6.2%. Going forward, the deceleration of inflation is projected to continue, albeit less rapidly, with inflation declining to 3.1% in 2024 and 2.2% in 2025. Continued wage growth is likely to temporarily sustain inflation especially in the services sector. At the same time, energy price growth is expected to play a relatively minor role, only contributing positively to overall HICP inflation in 2024 as the VAT-rate on natural gas is raised to its original level.
Public finances on a path of consolidation
In 2023, the general government deficit is projected to decrease to 2.2% of GDP from 2.5% in 2022. This development is supported by the phase-out of COVID-19 pandemic measures, estimated at around 0.8% of GDP in 2022, and by the more-favourable-than-expected development of energy prices. From the dedicated fund (Economic Stabilisation Fund) of EUR 200 bn (4.9% of GDP), only around one quarter is projected to be spent overall to finance the electricity and gas price brakes to support households and companies: the forecast assumes a total net budgetary cost of these measures at around 1.0% of GDP in 2023 and only some negligible remainders until their withdrawal in April 2024.
In 2024, the government deficit is expected to further decrease to 1.6% of GDP. In addition to the phase-out of energy measures, fiscal consolidation is supported by a robust development of government revenue over the forecast horizon. However, government revenue will be negatively impacted by various tax measures, such as the one aimed at reducing the ‘tax bracket creep’ (to counter the fact that inflation pushes taxpayers into higher income tax brackets), tax measures aimed at increasing child allowances and other child support, as well as measures to support companies to enhance growth opportunities. In 2025, the government deficit is projected to further narrow to 1.3% of GDP.
In November 2023, after the cut-off date of this forecast, the German authorities announced a multiannual package of measures to cushion further the impact of high energy prices on industries. Their details and financing remain to be specified. This represents a downside risk to public finances in 2024 and 2025.
Government debt stood at 66.1% of GDP at the end of 2022 and is expected to gradually decrease to 63% over the forecast horizon.