IWH Economic Outlook 2024
Exports and Private Consumption Weak ‒ Germany is Waiting for an Economic Upturn
December 14, 2023
In the winter of 2023/2024, the German economy is still in a downturn. Parts of industry have lost competitiveness, real incomes have fallen in 2023 due to inflation, and there is uncertainty about the course of fiscal policy. However, rising real incomes and a slight increase in exports should cause a pickup from spring onwards. The Halle Institute for Economic Research (IWH) expects gross domestic product (GDP) to fall by 0.3% in 2023 and to expand by 0.5% in 2024 (East Germany: +0.5% and +0.7%). In September, the IWH forecast had assumed a decline of 0.5% for Germany in 2023 and expected growth of 0.9% for the coming year.
The global economy continues to lose momentum towards the end of 2023. The phase of recovery from the pandemic is largely complete, and the restrictive monetary policy shift triggered by the global surge in inflation is depressing demand for goods in many places due to higher financing costs.
The European and the Chinese economy are facing special burdens: In Europe, these are the Russian war against Ukraine and the high energy costs related to it. In China, it is the structural crisis in the property sector, which is of particular importance in this country.
However, there are also reasons to expect the global economy to pick up again somewhat in the coming year. In particular, the recently steep decline in inflation rates in the US and the euro area has increased the likelihood that monetary policy will be loosened somewhat in the course of 2024.
The German economy has not returned to its previous growth path since the end of the pandemic. In real terms, gross domestic product is barely higher than before the outbreak of the pandemic; this is 4% below the level expected for 2023 in the IWH's medium-term projection from December 2019. There are several reasons for this: Important areas of the manufacturing industry have lost competitiveness, particularly the automotive industry in the wake of the shift from combustion engines to electric motors and the chemical industry due to higher energy prices in Europe. In addition, global demand for industrial goods is currently weak. Moreover, infla¬tion in Germany is still high, and real incomes have been falling for some time. The tight¬ening of monetary policy has worsened the previously very favorable financing conditions, which is having a particularly negative impact on the construction industry. In addition, the economy has to prepare for new burdens because of the Federal Constitutional Court’s ruling on the second supplementary budget 2021 in November. There are no signs of an improvement in the economy over the winter. Over the course of 2024, however, rising real wages will support consumption, and the German export industry should benefit from international demand for manufacturing gradually picking up.
The German Climate Protection Act requires drastic reductions in greenhouse gas emissions that have far-reaching consequences for overall economic development and public finances. According to the IWH medium-term projection of the German economy, the associated additional government spending on public investment and support measures cannot be financed from projected tax revenues. It is therefore to be expected that the tax burden on households will increase and private consumption will be curbed accordingly, if both the current form of the debt brake and the greenhouse gas reduction targets are maintained.