Economy of Germany to Shrink Again in 2024
Economy of Germany to Shrink Again in 2024
Germany’s economy, one of Europe’s strongest manufacturing powerhouses, is projected to shrink again in 2024. According to a joint statement from five leading economic institutes—DIW, Ifo, IfW Kiel, IWH, and RWI—Germany’s output is expected to decline by 0.1 percent this year, following a 0.3 percent decrease in 2023.
This downward revision follows the institutes’ earlier prediction of a 0.1 percent GDP growth in 2024. They noted that the German economy has been stagnating for over two years, and while a slow recovery is expected in 2025, it is unlikely that the country will return to its pre-pandemic growth trend in the near future.
In 2025, economic growth is forecasted to reach 0.8 percent, down from the previous estimate of 1.4 percent, with an expected growth of 1.3 percent by 2026.
Factors Contributing to Economic Decline
Germany, traditionally a major driver of European growth, was the only major advanced economy to shrink in 2023. This was attributed to high inflation, an industrial slowdown, and reduced export demand, particularly from China. Although inflation has eased in 2024, economic recovery has remained elusive, with a continued slowdown in industrial activity and weak demand from key global markets like China.
The second quarter of 2024 saw the economy shrink by 0.1 percent, underperforming analyst expectations. DIW’s head of forecasting, Geraldine Dany-Knedlik, explained that early indicators for the third quarter suggest economic output may decline again.
Structural Challenges and Global Competition
Germany’s economic troubles are exacerbated by significant structural changes. Decarbonization, demographic shifts, and rising competition from China are dampening long-term growth prospects. The country’s manufacturing industry, a key driver of economic output, has been particularly affected by rising energy costs due to the Russian invasion of Ukraine in 2022.
China’s increasing competitiveness, particularly in high-quality goods for export, has displaced German exports in global markets. This has severely impacted Germany’s flagship auto industry, which is struggling to compete with China’s advancements in electric vehicles. Volkswagen, Europe’s largest auto manufacturer, is considering closing factories in Germany to remain competitive.
Prospects for Recovery
Despite the challenges, the economic institutes remain cautiously optimistic. They predict a revival of private consumption driven by rising real incomes, which could help boost the economy in the coming quarters. Additionally, improvements in key sales markets, such as neighboring European countries, are expected to support German foreign trade and provide forward momentum.
The labor market has also felt the effects of the economic slowdown, with slightly increased unemployment. However, as the economy is anticipated to pick up steam by 2025, unemployment figures are likely to decrease.
In summary, while Germany’s economy is facing a difficult year in 2024, structural adjustments and market dynamics could set the stage for a modest recovery in the years to come.
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