An economic recovery is yet to materialise. The German economy is not only struggling with persistent economic headwinds, but also with structural problems, said Joachim Nagel, President of the Deutsche Bundesbank, at the unveiling of the Bundesbank’s December Forecast for Germany. This is affecting the industrial sector in particular, as well as its export business and investments, he explained. The labour market, too, is now responding noticeably to the protracted weakness of economic activity, said President Nagel, adding that this was weighing on private consumption. Unlike previously projected, it is not acting as a driver of economic recovery. 

Germany’s gross domestic product (GDP) is therefore set to stagnate in the current winter half-year, only beginning to make a slow recovery over the course of 2025. The Bundesbank’s December Forecast for Germany projects a decline of 0.2 % in calendar-adjusted real GDP this year and only slight growth of 0.2 % next year. In 2026 and 2027, the German economy then sees somewhat stronger growth, of 0.8 % and 0.9 %, respectively. 

The Bundesbank experts anticipate only a gradual pick-up in export business. They assume that, after a further delay, business investment will also increase again. Although private consumption is set to grow throughout, it is no longer as dynamic as previously expected, Nagel explained. In view of the temporary cooling of the labour market and a decline in wage growth, consumer spending initially goes up only marginally. Overall, the growth outlook has thus been revised sharply downwards over the entire forecast horizon compared with the June Forecast for Germany 

In spite of subdued economic activity, the inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) sees only a slight fall in 2025 from an annual average of 2.5 % to 2.4 %. This is due to the temporarily steeper rise in food prices and only slowly abating price pressures affecting services. From 2026 onwards, however, the inflation rate in Germany is projected to gradually return to 2%, said President Nagel. This is thanks to two factors in particular: the previous monetary policy tightening and decreasing price pressures from labour costs.

Excluding energy and food, i.e. in terms the core rate, inflation is projected to decline from 3.3 % this year to 2.4 % next year and to 1.9 % in 2026. According to the December Forecast for Germany, the core rate is set to increase again slightly with the economic recovery towards the end of the forecast horizon. The Bundesbank experts project a rate of 2.0 % for 2027.

The government deficit ratio is expected to decrease slightly from 2.6 % in 2023 to 2.4 % in 2027. The expiry of government assistance measures put in place to address the energy crisis will provide some relief. However, other expenditure, such as social security, interest and defence spending, is projected to climb steeply. The debt ratio falls to 61.7 % by 2027 from 62.9 % in 2023. 

At present, the biggest source of uncertainty for the Forecast is a possible global increase in protectionism, President Nagel warned. There is also uncertainty surrounding geopolitical conflicts, the impact of structural changes and the orientation of future fiscal and economic policy following the Bundestag elections in February. All in all, the prevailing risks at present are of even weaker economic growth and higher inflation. 

Projection December 2024