Published : 1 month ago, on 13/11/2024

By Maria Martinez

BERLIN (Reuters) – Germany will continue to lag well behind other advanced economies next year, the German Council of Economic Experts said on Wednesday, as it cut its growth forecasts for Europe’s biggest economy for 2024 and 2025.

The world’s third-largest economy has lagged the European Union average since 2021 and is expected to shrink for the second year running in 2024, making it the worst performer among the Group of Seven rich democracies.

The council, an academic body that advises the German government on economic policy, cut its 2025 growth forecast to 0.4%, down from 0.9% growth in its spring forecasts.

The economic experts also revised their forecast for this year to a 0.1% decline in gross domestic product (GDP) from growth of 0.2% in their previous forecasts.

Germany’s GDP has only grown by 0.1% in real terms over the past five years, meaning that its economic development continues to lag in international comparisons, the council said.

Germany’s persistently weak economic development may stem primarily from a decline in production and value added in the manufacturing sector, it said.

The weakness of industry and the duration of the weak phase suggest that the German economy is being held back by structural problems as well as cyclical ones,” said Council chairwoman Monika Schnitzer.

While Germany’s economy is struggling with sluggish overseas demand, shortages of skilled labour and increasingly fierce competition from China, the global economy and industrial production are experiencing positive growth rates.

The Council report said global GDP was expected to grow by 2.6% in both 2024 and 2025, while eurozone growth was forecast at 0.7% this year and 1.3% next.

The decoupling of the German industrial sector from the global economy indicates that the German weakness is not only cyclical,” the economic experts said.

SERVICES SECTOR

While fighting to save its manufacturing sector, German policymakers may have overlooked the growth potential of the country’s services sector, which is proportionally smaller than in comparable European countries but is growing.

Downside risks to the forecast for the German economy lie in a deepening weakness in industry and a further increase in uncertainty, which could further delay the recovery in investment and private consumption, the economic experts said.

The release of the report comes a week after Donald Trump’s victory in the U.S. presidential election – won partly on promises of tariffs on imports, including from Europe – and after the collapse of Germany’s coalition government, both likely to exacerbate the country’s economic pain.

“In Germany, there have been failures in politics and the economy in recent years and decades,” Schnitzer said. “This makes it all the more important to drive forward the modernisation of our country with determination now.”

On a brighter note, inflation is expected to average 2.2% in 2024, 0.2 percentage points lower than in the spring forecasts, and will slow further to 2.1% in 2025, the experts’ report said.

Core inflation is expected to be at 3.0% in 2024 and 2.6% in 2025.

One upside risk for the economic outlook is if private household consumption revives, and the savings rate correspondingly declines, more quickly than hitherto expected, the report said.

(Reporting by Maria Martinez; Editing by Gareth Jones)