The German economy is expected to shrink by 0.2% in 2024, the economy ministry said on Wednesday, confirming the recent reports by German media and presenting a dire picture for the country often dubbed as Europe’s powerhouse as it is set for contraction for a second year in a row.
Germany is on the path of becoming the only member of the G-7 major industrial democracies to post shrinking output this year, as was also the case in 2023.
The government is cutting its forecast from a previous projection of 0.3% growth for this year, as the expected recovery in the second half of the year failed to materialize.
Germany’s economy was already the weakest among its large eurozone peers and other G-7 countries last year, with a 0.3% decline in gross domestic product (GDP).
If economic output contracts for a second consecutive year, which last happened in 2002-2003 when exporting and manufacturing industries struggled, Germany would be the only G-7 economy in contraction, according to the latest projections of the International Monetary Fund (IMF).
Germany’s economy contracted in the second quarter, sparking fears of a possible recession, which is defined as two consecutive quarters of contraction.
Early indicators such as industrial production and business climate suggest that the economic downturn has continued into the second half of the year, the ministry said.
The economy has not grown strongly since 2018 due to its structural problems and geopolitical challenges, German Economy Minister Robert Habeck said in his presentation of the forecasts.
To counter the cyclical and structural challenges, the German government has agreed on a growth package of 49 measures to stimulate the economy.
“If they are implemented, the economy will be stronger and more people will return to work,” Habeck said.
The plans must be approved by both houses of parliament later this year. That means the coalition government needs votes from opposition conservatives in the upper house Bundesrat, representing Germany’s 16 federal states.
Back to growth in 2025
By the turn of the year, the growth dynamics should gradually revive again, the ministry said, expecting 1.1% growth for 2025, up from 1.0% previously.
Growth is expected to resume in 2025 due mainly to increased private consumption resulting from higher wage settlements, falling inflation and tax relief, the ministry said. Lower interest rates should also stimulate consumption, it said.
For the first time, the government has included a forecast for 2026, when Germany’s economy is seen expanding by 1.6%.
Inflation is expected to decline further, slowing to 2.2% in 2024 from 5.9% last year, then to 2.0% in 2025 and 1.9% in 2026.
