Following a recession in 2023, economic activity in Germany is expected to stagnate in 2024. Domestic demand is set to pick up slowly in 2024 and 2025, as real wage growth resumes. However, investment is projected to remain well below pre-pandemic levels, constrained by continued high financing costs. Exports are forecast to remain sluggish in 2024 and slowly recover in 2025. Driven by domestic demand, GDP growth is expected to increase moderately in 2025. Fiscal consolidation continues with the government deficit and the debt-to-GDP ratio gradually decreasing, benefitting from the phase-out of energy support measures.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -0.3 | 0.1 | 1.0 |
| Inflation (%, yoy) | 6.0 | 2.4 | 2.0 |
| Unemployment (%) | 3.1 | 3.1 | 3.1 |
| General government balance (% of GDP) | -2.5 | -1.6 | -1.2 |
| Gross public debt (% of GDP) | 63.6 | 62.9 | 62.2 |
| Current account balance (% of GDP) | 6.9 | 7.0 | 7.0 |
Stagnation followed by a sluggish recovery
The German economy went through a recession in 2023 when real GDP declined by 0.2% (according to the latest GDP release by the German Federal Statistical Office). Despite continued headwinds, it recovered slightly at the start of 2024, with economic activity expected at 0.2% qoq in the first quarter of 2024. Purchasing power recovered significantly during the previous year but private consumption remained sluggish during 2023. Investment is still expected to contribute negatively to economic growth in 2024. At the same time, weak foreign demand for capital and intermediate goods is affecting German exports. Overall, real GDP growth is forecast to increase by 0.1% in 2024.
With an expected further easing of inflation, real household income is set to continue to recover. Combined with improved consumer sentiment, private consumption is projected to return to pre-pandemic levels in 2025. After a strong decline in investment activity during the previous years, recovery in investment growth is expected in 2025, also thanks to the assumed improvement of financing conditions. At the same time, the persistently high housing demand is expected to support a recovery in construction as from the second half of 2024. Trade is not projected to support growth in 2024 and it is set to have only a minor positive contribution in 2025. The main reasons behind this are a loss of competitiveness in some (mainly energy intensive) sectors. Overall, real GDP growth is forecast to recover moderately to 1.0% in 2025.
Labour market to remain stable
In 2023, a record-high 83.6% of the population aged 20-64 was active on the labour market, up from 83.3% a year before. The resilience of the labour market is also reflected in the unemployment rate, which is expected to remain broadly stable at around 3.0% over the forecast horizon. The job vacancy rate has been somewhat receding given the softening of economic activity, but it remains at high levels, and the acceleration of ageing will continue to weigh on labour supply and tightness of the labour market. In 2023, real wages turned a corner and grew significantly, after several quarters of real wage losses. Real wages are set to continue their recovery in 2024 and 2025, in a context of higher nominal wage outcomes and lower inflation.
Inflation to ease further
Inflation has decelerated steadily since October 2022 on the back of the decline in wholesale energy prices and the introduction of measures to mitigate the impact of high energy prices. However, the phase-out of these measures and higher fuel costs are expected to contribute positively to overall inflation in 2024 and 2025. The decrease in inflation is also set to be slowed down by continued wage growth, which is expected to sustain price pressures in services. Overall, inflation is projected to ease to 2.4% in 2024 and 2.0% in 2025, down from 6.0% in 2023.
Public finances on a path of consolidation
In 2023, the general government deficit remained at 2.5% of GDP. The gas and electricity price brakes replaced a variety of earlier energy-related measures, while the increase in the long-term care contribution rate helped to compensate income tax cuts due to tax bracket adjustments and increases in tax allowances for children.
With the “debt brake” back in force as from 2024, the spending possibilities of the government will be more limited in the years to come.
In 2024, the government deficit is expected to decrease to 1.6% of GDP, as a result of the phase-out of measures to mitigate the impact of high energy prices dropping from 1.2% of GDP in 2023 to 0.1% of GDP, and of a robust development of government revenue. Solid tax revenue and strongly increasing social contributions, due to rising salaries and social contribution rates, are expected to more than outweigh income tax reductions and the increase in child allowances.
In 2025, based on unchanged policies, the general government deficit is projected to further decrease to 1.2% of GDP. On the revenue side, social contributions are set to benefit from the phase-out of the inflation compensation bonus that allowed employers to pay a tax-free and social contribution-free bonus of up to EUR 3.000 in total during the period end 2022 to end 2024. On the expenditure side, robust growth is set to continue as pension payments and public sector wages are projected to increase noticeably.
The government debt level dropped to 63.6% of GDP in 2023. It is expected to slowly decrease over the forecast horizon, to 62.9% and 62.2% in 2024 and 2025 respectively, due to inflation and the reduced debt increasing impact of primary deficits. The introduction in 2024 of a capital-based element to the pension system will increase the gross debt ratio by around 0.3 pps. every year going forward, without impacting the government deficit, as the yearly contributions to this investment fund constitute financial transactions.