Germany Economy Q4 2023: Shifting from Reverse to 1st Gear in 2024
by CTM News Team
Germany 2024 Economic Outlook
Outlook. Germany is currently experiencing a light recession; however, it is expected to reverse to positive territory during 2024. The economy is seeing a contraction in production of 0.1% to 0.3%. Bundesbank posits that “…from the beginning of 2024…the German economy is likely to return to an expansion path and gradually pick up speed.” (Deutsche Bundesbank) This growth is projected to begin in 2024 and continue through 2026. “The current projection assumes that calendar-adjusted real gross domestic product (GDP) will increase by 0.4% in 2024 following a slight contraction of 0.1% this year. In 2025 and 2026, the economy will grow by 1.2% and 1.3% respectively.” (Deutsche Bundesbank)
Recent Situation. The inflation rate peaked over a year ago and has continued to decline as interest rate increases appear to be having their desired impact. Germany is a highly export focused economy with manufacturing serving as a large percentage along with software, and other related services. With the world economy being relatively stagnant this has lowered demand for German exports. Higher interest rates and high energy costs have negatively impacted the economy. “However, going forward, domestic demand is set to pick up, driven by a real wage increase. Together with recovering foreign demand, this is expected to support a pick-up in GDP growth to 0.8% in 2024 and 1.2% in 2025.” (European Commission)
Possible Obstacles. Germany is universally viewed as a highly resilient economy and has weathered far more challenging economic times. The consensus forecast is lightly positive though various external factors could lead to greater unpredictability. Germany’s high reliance on manufacturing would suffer from another spike in energy prices from the ongoing war or other geopolitical tensions that could boil over. A decline in international demand could also have an unfavorable impact on the German economy as a decrease in demand would ripple through to lower production. The consensus is hopeful, but external factors should always be kept in mind. “Despite the decline in economic growth this year, we expect the economy to recover and grow slightly across 2024 and 2025. However, external factors – such as the evolution of global demand and geopolitical tensions – may have an unpredictable impact on the overall extent of growth.” (KPMG)
Summary
- Germany should move from contraction to light expansion in 2024
- A contraction in production of 0.1% to 0.3% in 2023, but a projected rise (0.4% to 0.8%) in 2024
- External factors (e.g. demand) expected to be more economically favorable in 2024 than 2023
- Unpredictable obstacles (e.g. energy costs) could interfere with the expected growth rate
GDP (Billions of Euros)
Source: Eurostat, Gross Domestic Product for Germany [CPMNACSCAB1GQDE], Federal Reserve Bank of St. Louis. Eurostat, Real Gross Domestic Product for Germany [CLVMNACSCAB1GQDE], Federal Reserve Bank of St. Louis.
CPI (Contribution to Annual Inflation)
Source: Organization for Economic Co-operation and Development, Consumer Price Index: All Items: Total for Germany [DEUCPALTT01CTGYM], Federal Reserve Bank of St. Louis.
Central Bank
Source: European Central Bank, ECB Main Refinancing Operations Rate: Fixed Rate Tenders for Euro Area [ECBMRRFR], Federal Reserve Bank of St. Louis. European Central Bank, ECB Deposit Facility Rate for Euro Area [ECBDFR], Federal Reserve Bank of St. Louis. European Central Bank, ECB Marginal Lending Facility Rate for Euro Area [ECBMLFR], Federal Reserve Bank of St. Louis. European Central Bank, Central Bank Assets for Euro Area (11-19 Countries) [ECBASSETSW], Federal Reserve Bank of St. Louis.
Additional Quotes
The current projection assumes that calendar-adjusted real gross domestic product (GDP) will increase by 0.4% in 2024 following a slight contraction of 0.1% this year. In 2025 and 2026, the economy will grow by 1.2% and 1.3% respectively. Compared with the June projection, the GDP rate has been lowered significantly for 2024 and slightly for 2025. Key factors are weaker foreign demand, slower growth in consumption and tighter financing conditions.
Source: Monthly Report December 2023.
As inflation continues to ease and real disposable household income increases, investment and private consumption are expected to recover to their pre-pandemic levels over the forecast horizon. Construction is set to resume growth during the second half of 2024, supported by high housing demand. At the same time, energy costs are expected to remain elevated, preventing a more dynamic recovery, particularly in energy-intensive industries. With demand from Germany’s main trading partners stabilising, the contribution from net trade is projected to be broadly neutral in 2024 and mildly positive in 2025. Germany is expected to see an increase in current account surpluses towards 6.5% over the forecast horizon. Overall, growth is forecast to increase to 0.8% in 2024 and to 1.2% in 2025.
Source: Economic forecast for Germany.
In 2024, the German economy is likely to register slight growth and potentially grow faster than some other G7 countries. Rising wages, falling energy prices and the ability of exporters to pass on costs to foreign customers could gradually restore domestic purchasing power in the coming year. The absence of further interest rate increases – and possibly even a fall in interest rates over the course of the year – could also help the German economy to continue its upswing.
Source: Global Economic Outlook.
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