Economic Outlook – IWH Halle

Joint Economic Forecast Autumn 2024

German economy in transition ‒ weak momentum, low potential growth

September 26, 2024

The Joint Economic Forecast Project Group forecasts a 0.1% decline in Germany's gross domestic product in 2024. Looking further ahead, the institutes expect a weak recovery with growth of 0.8% (2025) and 1.3% (2026). Compared to the spring forecast, this represents a downward revision of 0.2 (2024) and 0.6 (2025) percentage points. “In addition to the economic downturn, the German economy is also being weighed down by structural change,” says Dr Geraldine Dany-Knedlik, head of Forecasting and Economic Policy at the German Institute for Economic Research (DIW Berlin). “Decarbonisation, digitalisation, and demographic change – alongside stronger competition with companies from China – have triggered structural adjustment processes that are dampening the long-term growth prospects of the German economy.”

The German economy has been stagnating for more than two years. A slow recovery is likely to set in next year, but economic growth will not return to its pre-coronavirus trend for the foreseeable future. The overlapping effects of structural change and the economic downturn are particularly evident in the manufacturing sector. Capital goods manufacturers and energy-intensive industries are particularly affected. Their competitiveness is suffering from higher energy costs and increasing competition from high-quality industrial goods from China, which are displacing German exports on world markets. In terms of the economy, the manufacturing industry is also struggling with the weakening of the global industrial sector and the associated lack of new orders. This is mitigated by the strong increase in gross value added in select areas of the service sector, particularly those dominated by the state, such as education and healthcare.

The Joint Economic Forecast Project Group considers the continuing weakness in investment to be symptomatic of the problems in the manufacturing sector. The persistently high interest rate level alongside the elevated economic and geopolitical uncertainty are likely to have weighed heavily on the investment activities of companies and the propensity of private households to make purchases. Private households are increasingly saving their money instead of spending it on new residential property or consumer goods.
According to the report, the structural adjustment processes are likely to continue and the economic brakes will only be gradually released. The tentative recovery is driven by a revival in private consumption, which will be supported by strong growth in real disposable incomes. The upturn in key sales markets, such as neighbouring European countries, will support German foreign trade. Together with more favourable financing conditions, this will benefit investment in fixed assets.

The Joint Economic Forecast is prepared by DIW Berlin, ifo München, IfW Kiel, IWH, and RWI Essen.

Services stabilise the East German economy

In 2024, the East German economy is expected to grow by 0.2%, while it will decline by 0.1% in Germany as a whole. The Halle Institute for Economic Research (IWH) is forecasting an East German growth rate of 0.7% in 2025, and a rate of 1.2% in 2026. According to the IWH forecast, the unemployment rate in eastern Germany is likely to be 7.5% in 2024 as well as 2025 and 7.2% in 2026.