The German government on Wednesday slashed its 2024 forecast for Europe’s largest economy, saying it will contract for a second straight year before a recovery gets underway in 2025.

Output is expected to shrink by 0.2 per cent in 2024, the economy ministry said in a statement, a sharp downgrade from the 0.3 per cent expansion previously forecast.

Germany’s economy stalled in the first half of the year and a slew of disappointing indicators recently suggest “the economic weakness will persist into the second half of the year”, it said.

German Chancellor Olaf Scholz is seen during a bilateral meeting with Namibian President on the sidelines of the Sustainability Conference at the City Hall in Hamburg, northern Germany on October 7, 2024. (Photo by Marcus Brandt / POOL / AFP)

Germany was already the only major advanced economy to fall into recession last year when it contracted by 0.3 per cent, acting as a drag on the wider eurozone.

Stubbornly weak domestic and foreign demand, high interest rates and costly energy in the wake of Russia’s war in Ukraine have all weighed heavily on the German economy — particularly its crucial manufacturing sector.

German Chancellor Olaf Scholz (R) and Serbia’s Presient Aleksandar Vucic (L) are pictured at the start of a bilateral meeting on the sidelines of the Sustainability Conference at the City Hall in Hamburg, northern Germany on October 7, 2024. (Photo by Marcus Brandt / POOL / AFP)

At the same time, the country faces structural challenges including an ageing population, increased competition from China, burdensome bureaucracy and a complex green transition.

“Germany’s structural problems are now taking their toll,” Economy Minister Robert Habeck said.

“And this is happening amid major geo-economic challenges. Germany and Europe are caught in the middle of crises between China and the United States and must learn to assert themselves,” he added.

Germany’s woes were highlighted by a spate of bad news from the country’s carmakers recently, as the flagship industry struggles with rising production costs and fierce competition from Chinese manufacturers on electric vehicles.

Volkswagen, Europe’s biggest auto manufacturer, last month cut its annual outlook and said it would for the first time have to consider closing factories in Germany.

Barbadian Prime Minister Mia Amor Mottley (L) speaks with German Chancellor Olaf Scholz during the Sustainability Conference at the City Hall in Hamburg, northern Germany on October 7, 2024. (Photo by Axel Heimken / AFP)

Rivals BMW and Mercedes-Benz have also lowered their outlook, citing falling Chinese demand.

Habeck warned that a Donald Trump victory in next month’s US presidential election could worsen the problems for the German auto industry.

Trump has said he plans to levy tariffs on all foreign imports, including cars.

“We will then face ever greater problems, so you have to see that with great concern,” said Habeck.

– Optimism for 2025 –

The economy ministry nevertheless expressed confidence that a rebound was just around the corner.

Higher wages, easing inflation and lower interest rates are expected to encourage domestic consumption next year, the ministry said, while an improved global outlook should boost exports and industrial investments.

The economy is expected to grow by 1.1 per cent in 2025, according to the latest forecasts, up from a previous estimate of one per cent.

In 2026, output is predicted to expand by 1.6 per cent.

Hamburg’s First Mayor Peter Tschentscher (C-L) and German Chancellor Olaf Scholz (C-R) pose for a photo with the participants of the Hamburg Sustainability Conference at the City Hall in Hamburg, northern Germany on October 7, 2024. (Photo by Axel Heimken / AFP)

Habeck said the government’s proposed “growth initiative” had a key role to play in the anticipated economic revival.

The measures include tax breaks for companies making investments, reduced energy prices for industry, less red tape and incentives to keep older people in the workforce as well as to attract foreign skilled workers.

“The economy will grow more strongly,” Habeck said if the measures are “fully implemented”.

Business associations have warned that the measures would not be enough.

The growth package is welcome “but nowhere near enough to truly get Germany back on track economically”, Peter Adrian, president of the German Chamber of Commerce and Industry (DIHK), told the Rheinische Post newspaper.

German Minister of Economics and Climate Protection Robert Habeck and Director General for Economic Policy at the Federal Ministry for Economic Affairs and Climate Action Elga Bartsch hold a press conference on the government’s updated growth forecast, in Berlin on October 9, 2024. – The German government slashed its 2024 forecast on October 9, 2024 and said it now saw Europe’s largest economy contracting for a second straight year before a recovery gets under way in 2025, bolstered by domestic and foreign consumption. (Photo by John MACDOUGALL / AFP)

Wednesday’s bleak forecast spurred new calls for a relaxation of the “debt brake”, constitutionally enshrined rules that cap annual levels of borrowing, to spur much-needed new investments.

The government should “declare an emergency and suspend the debt brake”, Achim Truger, an economist who is a member of a panel that advises the government, told broadcaster NTV.

With the economy facing such a “dramatic” situation, “you can justify spending a lot of money again”, he added.

AFP