German economy slowly getting back on track

The Bundesbank forecasts a gradual recovery for the German economy after approximately two years of weakness. Bundesbank President Joachim Nagel noted that private consumption and export business are expected to improve from the second half of the year, bolstering industrial growth. The current forecast anticipates a 0.3% rise in real GDP this year, followed by 1.1% growth in 2025 and 1.4% in 2026, aligning with the December 2023 projections. The German economy saw a contraction of 0.5% in Q4 2023, but managed a 0.2% expansion in Q1 2024. Sluggish industrial demand and heightened economic policy uncertainty have dampened domestic investment, though energy-intensive sectors and construction have shown resilience.

Private consumption and exports are projected to be the primary drivers of economic recovery. While GDP growth in the current quarter is expected to mirror Q1, service providers are likely to see more robust recovery as private consumption gains momentum. Business investment, however, may continue to decline due to weak new orders. Despite these challenges, production in energy-intensive sectors is on the rise, and the automotive industry may offer limited growth stimulus. Economic activity is anticipated to accelerate in Q3, with stronger industrial contributions and solidifying consumer activity. The economy is expected to grow at a brisker pace in 2025, with a further uptick in 2026, driven primarily by private consumption and exports, although private investment may not significantly contribute until 2026.

Consumer price inflation in Germany is expected to decline slowly. The Harmonised Index of Consumer Prices (HICP) is predicted to drop from 6.0% last year to 2.8% in 2024, largely due to easing energy and food price inflation. However, inflation in services remains persistent due to strong wage growth. Negotiated wages are forecast to rise sharply this year and continue growing, leading to higher labor costs reflected in food prices. Headline inflation is projected to decrease to 2.7% in 2025 and 2.2% in 2026, while core inflation (excluding energy and food) will decline more slowly due to rising labor costs. Negotiated wage growth will moderate from 2025 onwards, but actual earnings will consistently outpace negotiated wages.

Despite economic challenges, the labor market has remained stable. Employment is expected to grow moderately, with working hours likely to recover first. Unemployment may rise slightly in the coming months before gradually falling towards the end of the year. From 2025, demographic changes will limit labor supply, increasing labor market tightness and halting employment growth by 2026. The economic recovery will increasingly rely on rising labor productivity as working hours per employee increase. Public finances are projected to improve, with the government deficit ratio shrinking from 2.5% last year to 1.1% in 2026. This improvement will initially result from the expiration of fiscal crisis assistance measures, with further relief expected from restrained central government spending and a more favorable economic situation. The debt ratio is anticipated to fall to just over 60% by 2026.