German economy set to stagnate this year, Ifo institute says
GERMANY’S economy is likely to stagnate this year, the country’s Ifo institute said on Thursday (Sep 5), abandoning its previous forecast of 0.4 per cent growth.
“The German economy is stuck and is bobbing around in the doldrums, while other countries are feeling the upswing,” said Ifo head of economic research Timo Wollmershaeuser.
The German economy contracted in the second quarter, sparking fears of another recession. A recession is defined as two consecutive quarters of economic contraction.
Asked whether he expects a recession, Wollmershaeuser said he deliberately avoids using the term.
He said Germany’s economy is growing by half a per cent per year at most, which means average growth on a quarterly basis of somewhere between 0.1 per cent and 0.2 per cent going forward.
“This means that we will very often find ourselves in situations where GDP is sometimes negative and sometimes positive, simply because of normal economic fluctuations,” Wollmershaeuser said. “We can’t talk about recession every time. I much prefer the term crisis”
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In its updated forecasts, Ifo said it expects the economy to grow by 0.9 per cent next year, below a previous 1.5 per cent forecast, and by 1.5 per cent in 2026.
Inflation has continued to fall this year and is expected at 2.2 per cent, down from 5.9 per cent in the previous year. It will continue its downward trajectory, falling to 2.0 per cent in 2025 and 1.9 per cent in 2026, according to Ifo’s forecasts.
Despite easing inflation, consumption will remain weak, according to the institute.
“The order situation is poor and the gains in purchasing power are not leading to increased consumption, but to higher savings because people are insecure,” Wollmershaeuser said.
Germany’s savings rate stands at 11.3 per cent, significantly above the 10-year average of 10.1 per cent before the pandemic.
Unemployment is likely to rise to 6 per cent in 2024 from 5.7 per cent in 2023. It will then fall to 5.8 per cent next year and reach 5.3 per cent in 2026, Ifo said.
Wollmershaeuser said Germany has a structural crisis. “Too little investment is being made, especially in manufacturing, and productivity has been stagnating for years,” he said.
German industrial orders unexpectedly rose in July, but the increase was flattered by some large orders, making economists doubtful the sluggish sector was on the cusp of a sustained upturn.
Manufacturing output is set to decline by 2 per cent this year compared to last year, according to Ifo’s forecasts.
Decarbonisation, digitalisation, demographic change, the coronavirus pandemic, the energy price shock, and China’s changing role in the global economy are putting pressure on established business models and forcing companies to adjust their production structures, Wollmershaeuser said. REUTERS
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