A new forecast expects the overall German economic output to contract this year, mainly due to a slower-than-expected recovery in the industry and private consumption.
Germany is struggling to get back to the role of the economic engine of the EU.
According to five economic institutes who provide their common forecast twice a year, the country’s GDP is expected to decline by 0.6 in 2023, as rising interest rates take their toll on the economy and high inflation depresses consumption.
The previous forecast made in spring 2023, expected stagnation.
"The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected in spring," says Oliver Holtemöller, Vice President and Head of the Macroeconomics Department at the Halle Institute for Economic Research (IWH).
Germany has been in a downturn for more than a year, mainly due to the sharp rise in energy prices in 2022. The loss of cheap natural gas sources such as Russia, put the country’s energy-intensive industries in a difficult situation.
Consumer price inflation has made things worse, rising to over 8%, leaving domestic consumption at a low level. Meanwhile, the high interest rates hit the construction industry very hard.
The business sentiment is low, partially due to heightened political uncertainty.
Overall, the indicators suggest that production fell again noticeably in the third quarter of 2023.
Bright news on the horizon
However, wage increases have followed the price hikes, energy prices have fallen, and exporters have partially passed on their higher costs, meaning that purchasing power is returning, economists said. Therefore, the downturn is expected to subside by the end of the year.
In the last quarter of the year, growth is forecast to pick up again, with a modest 0.2% expansion.
For 2024, the institutes forecast GDP growth of 1.3%, down from 1.5% previously. For 2025, a 1.5% GDP expansion is forecast.
The Joint Economic Forecast is one of the main indicators for the country’s economics ministry to follow, prepared by the ifo Institute, the Halley Institute for Economic Research, the Kiel Institute for the World Economy, the RWI – Leibniz Institute for Economic Research and the Austrian Institute of Economic Research.