The German economy is not only struggling with persistent economic headwinds, but also with structural problems, said Bundesbank President Joachim Nagel, presenting the Bundesbank’s new Forecast for Germany. The Bundesbank projects a slight decline of 0.2 % in real gross domestic product (GDP) in 2024.  In the next few years, the economy could then grow by 0.2 % (2025), by 0.8 % (2026) and by 0.9 % (2027). The economists are therefore revising their growth outlook sharply downwards compared with the June Forecast for Germany. 

It is becoming increasingly apparent that the German economy is struggling not only with persistent economic headwinds, but also with considerable structural problems, the Bundesbank writes in the current Forecast for Germany. The export-oriented industrial sector, in particular, is under intense pressure to adjust.  Domestically producing industrial firms must adjust, amongst other things, to higher energy costs and the requirements of the green transition to a carbon-neutral economy, as well as to the consequences of demographic change. In addition, German firms are increasingly being confronted with protectionist tendencies and growing competition from emerging markets. China, in particular, has gained considerable ground in the automotive and chemical industries and mechanical engineering – sectors which are particularly integral to German industry – as well as distinct market shares, the economists write. Private consumption is also likely to be weaker than expected in the June Forecast, no longer acting as an independent driver of the expected economic recovery. 

Temporary marked weakening of labour market

The ongoing weakness of the Germany economy is now impacting the German labour market noticeably and also more strongly than previous expectations. That said, the labour market remains fairly robust, with the level of employment high and unemployment relatively low, according to the Forecast. Sluggish aggregate economic activity is likely to lead to employment falling somewhat further in the 2024‑25 winter half-year, however. The economists expect employment to drop again slightly in 2025 and unemployment to rise further. The labour market is not likely to recover again until 2026, according to the Bundesbank’s economists. In view of the prolonged economic weakness, the weaker labour market outlook overall and lower inflation, wage growth is also set to be significantly weaker in future.

Inflation rate returns to 2 %

The inflation rate was lower than expected recently, the economists write. At 2.5 % in the current year overall, it is expected to be slightly lower than anticipated in June.  Only from 2026 onwards does the Bundesbank expect an inflation rate (as measured by the Harmonised Index of Consumer Prices – HICP) of roughly 2 % (2026: 2.1 %, 2027 1.9 %).  The previous monetary policy tightening is likely to still have an impact and the pressure exerted by unit labour costs will ease. The economists expect the inflation rate to initially remain elevated in 2025 at 2.4 %, mainly because services inflation will fall only slowly.  Particularly strong price increases are expected in 2025 for public transport, insurance services, rents and package holidays. 

Forecast subject to a number of uncertainties

 According to the Bundesbank’s Forecast for Germany, Rising geopolitical tensions or increased protectionist measures entail significant downside risks to economic output and upside risks to inflation. The impact of climate change and climate policy also poses risks for the forecast, with a higher carbon price potentially increasing inflation. At the same time, the structural changes in Germany and abroad could have an even greater impact on the economy and dampen potential output more strongly than previously estimated.  Lastly, there is uncertainty surrounding the future orientation of fiscal and economic policy following the Bundestag elections All in all, as things now stand, risks to economic growth are predominantly tilted to the downside and risks to inflation to the upside, the economists conclude.