Despite continued declines in inflation and rising real wages, institutes are currently cutting their growth forecasts for the German economy for 2024. Above all, uncertainty is a notable reason for the sometimes significant readjustment: Be it due to the geopolitical risks, the prolonged budget dispute in Berlin, energy prices, or the generally sluggish global economy. This uncertainty dampens the willingness of companies and private households to invest and thus delays the recovery.

The Ifo Institute expects gross domestic product (GDP) to increase by 0.9% next year. Most recently, the Munich economic researchers had assumed 1.4%. In 2025, it should be 1.3%, which is 0.1 percentage points more than predicted in September. “The development in the last quarter of 2023 is likely to be weaker than previously assumed, which will also have an impact next year,” explained Ifo economics chief Timo Wollmershäuser. He expects the economy to recover from next year gradually and “the economy to grow at stronger rates” – after “overall economic performance will probably only stagnate in the current quarter”.

The Federal Ministry of Economics was somewhat more pessimistic in the December monthly report presented on Wednesday: “After the price-, seasonally- and calendar-adjusted gross domestic product (GDP) fell by 0.1% in the third quarter, given the current monthly indicators such as new orders and industrial production, suggest a probable slight decline in GDP for the year-end quarter.” Above all, investment development, which has been positive until recently, is likely to slow – the reasons for this are the weaker order situation, less favourable financing conditions, and the expiration of the “environmental bonus”.

Wollmershäuser expects a decline of 0.3% for the coming year, which is at least 0.1 points more shrinkage than in the autumn forecast. This means that the Ifo joins the more optimistic voices – on average, economists expect a GDP decline of 0.5% for 2023.

“This is further amplified by the unclear situation surrounding the federal budget following the Constitutional Court’s ruling,” warned Wollmershäuser. If the 2024 budget were to be cut by 20 billion euros, the growth rate would fall from 0.9% to 0.7%, according to the Ifo model. “Investment projects that were thought to be safe are now up for grabs, and funding may not flow,” explained Geraldine Dany-Knedlik from the German Institute for Economic Research (DIW Berlin). These cuts and uncertainties are expected to reduce growth by 0.3 and 0.2 percentage points in 2024 and 2025, respectively. After −0.3 this year, the DIW expects growth of 0.6% and 1.0% for the next two years.

Oliver Holtemöller from the IWH warns of a loss of trust "in the framework conditions set by politicians if the promised support for a large number of investment projects were to be eliminated or significantly reduced." Confidence in the climate-neutral renewal of the economy could also be lost, as the path advocated by policymakers so far primarily involves state subsidisation of green investments. “Such losses of trust could also have a greater impact on the willingness to consume and invest in Germany in the short-term than assumed in the current forecast,” said Holtemöller.

Basically, according to Ifo expert Wollmershäuser, the course is set for recovery. The sharp rise in wages is causing optimism. Now that employment is higher than ever before, purchasing power is returning, and overall economic demand should increase again, explains Wollmershäuser. “In addition, we would have left the peaks in interest rates behind us.” Capital market and loan interest rates have been falling since the beginning of November. The Ifo expects the ECB to cut its key interest rate for the first time in the early summer of next year. Construction, in particular, should benefit from this. “Only after the interest rate turnaround expected in the summer will investment gradually increase again,” expects the DIW.

While the tailwind from the labour market is easing for the time being, price inflation is slowing, primarily due to falling energy prices, the Ifo continues. After an unemployment rate of 5.7% this year, rates of 5.9 and 5.6% are predicted for the next two years. The inflation rate is expected to reach the European Central Bank (ECB) price target of 2% in the second half of 2024. After 5.9% this year, the inflation rate is expected to be 2.2% in 2024 and 1.8% in 2025. Core inflation – excluding energy – will continue to be higher at rates of 6.0% (2023), 2.9% (2024) and 2.2% (2025). Inflation in consumer-related services will also be “well above 3% for a while, as wages are rising sharply there,” the Ifo continues.