The Bundesbank sees the German economy continuing to grow in the coming months, albeit with a time lag. As from the beginning of 2024, the German economy is likely to return to an expansion path and gradually pick up speed, Bundesbank President Joachim Nagel said regarding the current Forecast for Germany. According to the Forecast for Germany, calendar-adjusted real gross domestic product (GDP) will increase by 0.4% next year, following a slight contraction of 0.1% this year.

In 2025 and 2026, the economy will grow by 1.2% and 1.3%, respectively. The recovery will be postponed for around three quarters compared with the June forecast, according to the experts. The GDP growth rate was lowered significantly for 2024 and slightly for 2025. One reason why the recovery is initially still taking time to materialise is the unexpectedly weak foreign demand in industry, which is weighing on production and exports alike. Moreover, private consumption is restrained and higher financing costs are dampening investment.

Growing exports and rising wages support recovery 

As from the beginning of 2024, the economy is set to gradually slowly pick up speed. Initial signs of a slight improvement are visible in the business expectations as surveyed by the ifo Institute, which brightened somewhat in October and November. Over the projection horizon, the German economy will benefit mainly from two factors. Exports will rise on the back of expanding foreign sales markets. And, owing to the stable labour market, strong wage growth and falling inflation, households will spend more money on consumption again. Real household incomes will rise significantly, stressed Bundesbank President Nagel. On the other hand, private investment will initially continue to decline and will resume providing moderate stimulus only in 2026. The experts expect the economy to return more or less to potential output in 2026. 

Inflation on decline – but no all-clear yet 

Inflation in Germany is on the decline, but it is still too early to sound the all-clear, Joachim Nagel said. It is only this year that core inflation (excluding energy and food) will peak at 5.1%, he added. Next year, he continued, it will fall considerably to 3.0%. Supply bottlenecks would then no longer be such a major problem and profit margins would normalise. “Monetary policy tightening is increasingly yielding results,” the Bundesbank President explained. 

Overall, the inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) is set to fall from 8.7% last year to 6.1% in the current year. Next year, the Bundesbank sees it going down to 2.7%, less than one-half of the current figure. The forecast sees energy price inflation falling sharply and food price inflation also falling considerably. In the coming months, however, the inflation rate is likely to initially be significantly higher again than in November. A considerable surge is to be expected in December, in particular, as the government covering advance payments for gas and district heating bills had temporarily depressed price levels. The inflation rate will continue to slowly decline to 2.5% in 2025 and 2.2% in 2026, It will thus remain higher than its long-term average. 

Employment remains high

Despite the economy being mired in a downturn for over one and a half years, the labour market has remained remarkably stable. Only in the third quarter of 2023 did the previously significant increase in employment come to a halt. According to the Bundesbank, there is still a shortage of skilled workers in large parts of the economy. Given the only lagged and slow economic recovery, no increase in total employment is to be expected in the current quarter or the first quarter of 2024, the experts said. However, all leading indicators are suggesting that the high level of employment achieved can be maintained. According to the forecast, the labour market will pick up in the course of 2024 as the economic recovery takes hold. For 2025 and 2026, experts expect the labour market to become considerably tighter again, as the labour supply is set to continue to shrink.

Public finances continue to recover; new fiscal announcements do not significantly alter outlook

According to the Bundesbank’s experts, public finances will benefit from temporary support measures gradually expiring. This year and next, in their view, this will have a greater impact than rising expenditure on things such as defence and pensions. The deficit ratio will therefore fall to 2% in 2023 and even further to 1.3% in 2024. It is set to remain unchanged in subsequent years. The debt ratio will fall to somewhat above 60% by the end of 2026. The Forecast is based on simplified assumptions regarding the fiscal response to the ruling of the Federal Constitutional Court, according to the experts. The most recent Federal Government agreements on central government finances for 2024 were not reached until after the projection had been finalised. According to a preliminary assessment by the experts, however, they are not expected to significantly alter the fiscal and macroeconomic outlook. However, the Forecast reports that the projection is still subject to uncertainty regarding further fiscal policy decisions, especially for the years as from 2025 and the specific implementation of the energy transition. In addition, there are risks to the Forecast owing, in particular, to geopolitical conflicts.