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The federal government has slightly raised its growth forecast for this year as it sees early signs of a recovery in household purchasing power and industrial production in Europe’s largest economy.
Germany was the world’s worst-performing major economy last year, with a 0.3 percent decline in gross domestic product, and experts warn that the country risks becoming the “sick man of Europe.”
However, the government said the German economy would grow 0.3 percent this year, slightly above its last forecast in February of 0.2 percent. It forecast growth of 1 percent in 2025, which would still be weaker than expected in many of the world’s major economies.
The energy price shock caused by Russia’s cuts in gas exports after its invasion of Ukraine and a drop in global trade hit Germany harder than other leading economies, while a rise in inflation and high interest rates weighed heavily on German consumer spending.
But signs of a turnaround, albeit modest, are increasing, helped by the fact that wholesale prices for gas and electricity have returned to levels before the full-scale Russian invasion two years ago, providing much-needed relief to the industry .
Economics Minister Robert Habeck said there were “increasing signs in Germany that the economy is gradually recovering and the outlook is brightening.” He said industrial production had “increased noticeably” since the start of the year, including in energy-intensive industries.
Habeck’s ministry added that lower inflation, the prospect of lower interest rates later this year, rising wages and incomes, a stable labor market and stronger exports would boost activity.
That’s in line with expectations from some leading economists, who predict inflation will slow more than wages, boosting household purchasing power and making it likely that the European Central Bank will start cutting interest rates in June.
Consumer price inflation in Germany slowed to 2.2 percent in March, the lowest annual rate since June 2021, and the government now expects it to average 2.4 percent for all of 2024, down from 5.9 percent in Year 2023.
“People finally have more money in their pockets and, as things stand, they will also spend this money,” said Habeck. “Purchasing power increases.”
The upward revision to growth came as one of Germany’s leading economic think tanks, the Ifo Institute, said business confidence had risen to its highest level in almost a year, buoyed by hopes that lower inflation would boost household spending .
The Ifo said its business climate index, based on a survey of 9,000 companies, rose 1.5 points to 89.4, above forecasts by economists polled by Reuters and reaching its highest level since May 2023.
According to Ifo, sentiment improved in most sectors, particularly in the services sector. “Companies were more satisfied with their current business. Their expectations have also brightened,” said Ifo President Clemens Fuest.
But Habeck warned that despite the positive economic news, Germany must increase the pace of structural reforms. It has “fallen far behind” in terms of competitiveness and there is an urgent need to cut bureaucracy, reform European capital markets and address the severe skills shortage.
“The biggest short-term structural challenge is restraint [of many industries] to invest,” he said. “Any real recovery would be delayed if the construction industry [and] “Mechanical engineering is not making the necessary investments in transformation or in new capital goods.”