Germany's central bank (Bundesbank) has cut its growth outlook for the EU's largest economy, predicting that it will shrink this year and barely grow by 2025, amid worsening structural problems.
In its monthly report published on December 13, the Bundesbank said German GDP is expected to shrink by 0.2% this year due to more persistent weakness in the industrial sector, down from the 0.3% growth forecast previously.
The German central bank said the weakness in the industrial sector was now seen as structural and was weighing on exports and investment. The labor market was also affected, reducing private consumption, the report noted.
“In this context, the German economy would stagnate in the winter half of 2024-2025 and only begin to recover slowly throughout 2025,” the Bundesbank noted.
Output is expected to grow 0.2% next year, compared with a previous forecast of 1.1%. For 2026 and 2027, the Bundesbank forecasts growth of 0.8% and 0.9%, respectively.
“The German economy is struggling not only with persistent headwinds but also with structural problems,” Bundesbank President Joachim Nagel said in the report.
Mr. Nagel cited uncertainties surrounding geopolitical conflicts, the impact of structural changes and the future direction of fiscal and economic policy following the German Federal Parliament (Bundestag) elections in February. “Overall, the current risks are even weaker economic growth and higher inflation,” Mr. Nagel pointed out.
The report said domestic industrial companies should adjust to the long-term impacts of the energy price crisis caused by the Russia-Ukraine conflict, as well as the demands of the green transition and the consequences of demographic change, among other issues.
The Bundesbank also warned that a potential trade war with the US could push the German economy into recession. If President-elect Donald Trump carries out his threat to impose tariffs on all imports to the US, Germany's GDP could fall by 0.2 to 0.6 percentage points next year, the Bundesbank noted.
The eurozone's largest economy has lagged behind its peers in recent years, largely due to a prolonged manufacturing downturn. Germany is the only G7 economy to fall into recession by 2023.
