(Bloomberg) -- The German government revised down its gross domestic product forecast for this year to a contraction of 0.2%, the latest sign Europe’s biggest economy is struggling to shake off a prolonged period of inertia.
A decline in output in 2024 — following a drop of 0.3% last year — would mark only the second instance of consecutive years of shrinking GDP since West and East Germany were reunified in 1990. Economy Minister Robert Habeck had predicted expansion of 0.3% for this year in the government’s biannual forecasts published at the end of April.
A slow recovery is likely to take root into next year, with annual growth of 1.1% in 2025, before expansion accelerates to 1.6% in 2026, Habeck said Wednesday in an emailed statement.
He highlighted the urgent need to forge ahead with tackling Germany’s lingering “structural problems.” These include a lack of energy security, excessive bureaucracy and a shortage of skilled workers, which he said together with geopolitical uncertainty are weighing on activity.
“In the midst of the crises, Germany and Europe are squeezed between China and the US and have to learn to assert themselves,” Habeck said.
Concerns have been mounting in recent months about Germany’s economic decline, with the key auto sector especially hard hit.
A string of negative news — from Volkswagen AG’s threat to close domestic factories to Intel Corp.’s decision to postpone a new €30 billion ($33 billion) semiconductor facility in the former communist East — has highlighted the numerous challenges Germany faces.
The economy may already be in a technical recession, with another contraction in the third quarter possible after a 0.1% decline in output in the April to June period.
The weakness of its largest member is weighing on the wider euro area, with a recovery earlier in the year in the 20-nation currency bloc losing steam.
Chancellor Olaf Scholz’s ruling coalition in July agreed on another package of measures designed to boost the economy, including steps to strengthen private and public investment, speed expansion of renewable energies and cut red tape.
Habeck, a member of the Greens who is also the vice chancellor, has said they could add about half a percentage point to Germany’s rate of expansion once they’re fully implemented.
According to his ministry, growth impetus next year is expected due to the following factors:
- Household consumption, which is likely to increase due to rising purchasing power as a result of higher wage agreements
- Declining inflation
- Tax relief measures
- Lower interest rates stimulating spending
- German exports are also expected to pick up: together with more favorable financing conditions, this should lead to increased investment in machinery, equipment and vehicles
Peter Adrian, the president of Germany’s DIHK industry lobby, said the government’s growth initiative contains a number of “very sensible and long overdue measures” but doesn’t go far enough.
“We are currently experiencing relocations abroad, less industrial production at home, business closures and increasing numbers of insolvencies,” Adrian said Wednesday on the group’s website.
“Wake-up calls can hardly be louder,” he added, calling on the government to do more to trim bureaucracy and ease energy prices for German small and mid-sized firms.
They pay four times as much for electricity than rivals in other industrial nations, including taxes, network fees and surcharges, he said.
“And even if many people don’t want to hear it anymore, when it comes to bureaucracy there can only be one direction for the foreseeable future: down,” Adrian said.
--With assistance from Chad Thomas.
©2024 Bloomberg L.P.