German economy in stormy waters as government slashes forecast

The German government expects the economy to grow 0.2 per cent this year, far less than a previously forecast 1.3 per cent, as weak global demand, geopolitical uncertainty and persistently high inflation dent hopes for a swift rebound.

The revised forecast was approved by the cabinet on Wednesday as part of the government’s annual economic report, government sources said. Economy Minister Robert Habeck is scheduled to give details later in the day.

Europe’s largest economy shrank by 0.3 per cent in 2023 and is broadly expected to enter another technical recession in the first quarter of this year.

“The German economy continues to find itself in difficult waters at the beginning of the year,” said a draft of the report seen by Reuters.

It listed high inflation and a resulting loss of purchasing power among the challenges, as well as geopolitical crises and interest rate hikes.

Germany’s economic advisers plan to follow the federal government’s lead and reduce their forecast for economic growth in 2024, adviser Ulrike Malmendier told Reuters in an interview.

“I think we will definitely be going in the same direction… that is what our numbers are indicating,” Malmendier said.

The November forecast of the council of advisers to the government estimated growth would hit just 0.7 per cent in 2024. The next official update is due in mid-May.

The gloomy outlook for Germany comes amid concerns over its status as an industry location, as the government tries to reconcile its strict fiscal rules with the need to attract investment and help fund a costly green transition.

The draft government report points to a “normalisation” of fiscal policy in 2024, after a constitutional court ruling forced the coalition to make painful cuts in its 2024 budget.

The government is also expected to forecast an easing in inflation on Wednesday, from 5.9 per cent in 2023 to 2.8 per cent this year.