Top economists downgrade Germany’s growth forecasts

Stay informed with free updates

Simply sign up to the German economy myFT Digest — delivered directly to your inbox.

Germany’s leading economic institutes have downgraded the country’s growth forecast for this year, warning it will struggle to return to pre-pandemic rates of economic expansion.

In a joint report published on Thursday, the institutes — DIW Berlin, Ifo, IfW Kiel, IWH and RWI — said Germany’s GDP would shrink by 0.1 per cent this year and expand by 0.8 per cent next year and 1.3 per cent in 2026.

This spring they had forecast growth of 0.1 per cent this year and 1.4 per cent in 2025.

“The German economy has been stagnating for more than two years,” said Geraldine Dany-Knedlik of the German Institute for Economic Research (DIW Berlin).

A “slow recovery” would set in during the next few quarters, driven by a recovery in private consumption, but “economic growth will not return to its pre-pandemic trend for the foreseeable future”, she said.

The reasons were the deep structural problems facing the economy. “Structural adjustments to decarbonisation, digitisation, demographic change and stronger international competition are casting a shadow over Germany’s long-term economic prospects,” she said.

The institutes said German exports had not recovered since the pandemic at rates seen more broadly in international trade, due to rising energy prices and a shortage of skilled workers and because they were now less competitive on price than products being made in China.

The institutes’ latest forecast adds to a steady drumbeat of bad economic news that is causing increasing concern in Berlin.

Official data shows industrial production has fallen, orders are down, investment levels are declining and private consumption is in the doldrums, as Germans respond to increased political uncertainty by reining in spending.

The mood is particularly downbeat among Germany’s manufacturers. A key measure of sentiment in the sector, the Ifo index, this month dropped to its lowest level since June 2020, when the pandemic paralysed large parts of the economy.

Companies are increasingly responding to the worsening environment by cutting staff. Volkswagen, which has been buffeted by weak demand for electric vehicles at home and growing competition in the Chinese market, has announced it will close some German factories for the first time in its 87-year history.

Auto supplier ZF Friedrichshafen announced last month it would cut 14,000 jobs in Germany over the next four years. Meanwhile, cruise shipbuilder Meyer Werft is being bailed out with German taxpayers’ money after surging energy and raw material costs drove it to the brink of collapse.

The institutes noted that the weakness in the economy was beginning to affect the labour market, with “slightly increased unemployment”.

Germany’s jobless rate is about 6 per cent, up from 5.7 per cent a year ago.

They also warned of the effect increased political uncertainty in Berlin was having on levels of investment.

Speculation has been swirling that Chancellor Olaf Scholz’s fragile coalition of Social Democrats, Greens and liberals could fall apart amid sharp policy disagreements, most recently over the 2025 budget.

Dany-Knedlik said the febrile political mood and confusion about the direction of policy was becoming a “risk factor” for the economy.

“Concern that a government coalition in which the parties are clearly pursuing different goals could become incapable of action is growing,” she said, adding that this could further deter companies from investing.