Germany’s Economy Expected to Stagnate in 2024

Germany’s economy is projected to stagnate in 2024, failing to keep pace with other major European economies, according to the latest forecasts from the German economic institute IW. Despite a stronger-than-expected start to the year, the sluggish manufacturing and construction sectors will hold back growth, with overall investment depressed due to geopolitical uncertainties and high interest rates.

IW’s forecast, which is due to be published later on Wednesday, paints a bleak picture for Europe’s largest economy. Manufacturing and construction remain mired in recession, and while consumer spending is expected to increase as inflation eases, it’s not enough to drive a significant recovery. IW economist Michael Groemling remarked, “That’s not enough for a real upswing. In addition to consumption, investments must finally get going.” He pointed out that significant investment gaps have emerged, contributing to the economy’s stagnation.

Investment has been sluggish due to high energy costs, geopolitical instability, and elevated interest rates, which make financing more expensive. This trend contributed to Germany’s economic contraction of 0.2% last year, making it the weakest performer among the major eurozone economies.

The IW report forecasts 0% growth for Germany in 2024, while other major economies like France, Italy, Britain, and the United States are expected to grow. In the first quarter of 2024, Germany managed to avoid a recession, with the economy growing by 0.2% compared to the previous quarter. However, this slight growth followed a 0.5% contraction in the last quarter of 2023. The German government has forecast 0.3% GDP growth for this year, slightly more optimistic than IW’s prediction.

Groemling emphasised the need for policy measures to stimulate the economy, stating, “What is needed is a policy boost that improves business conditions. If nothing changes, we will continue to squander our potential.”

The IW forecast also indicates that foreign trade is unlikely to provide much economic stimulus in 2024, adding to the broader challenges facing Germany’s economy. Unemployment is expected to increase to an average of 6% in 2024, up from 5.7% in 2023. Despite a record number of 46 million employed people on average, the effects of economic weakness are becoming more visible in the labour market, according to Groemling.

As Germany continues to lag behind its European counterparts, policymakers will need to consider new strategies to revitalise the economy, encourage investment, and address the challenges in manufacturing and construction.