Germany faces downturn as growth slows

Germany is on course to be the only leading economy to contract this year, according to economists who have warned of a structural downturn that risks curbing growth.
A group of German and Austrian economic institutions said that Germany’s gross domestic product would shrink by 0.1 per cent this year, down from a previous projection of 0.1 per cent growth. They said output growth would accelerate to 0.8 per cent next year and by 1.3 per cent in 2026, well below its previous trend.
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If the contraction materialises, it is likely that Germany will be the only country in the G7 to suffer so-called negative growth in 2024 after shrinking by 0.3 per cent last year.
According to forecasts released by the Organisation for Economic Co-operation and Development, the club of rich developed countries, the UK economy is set to expand by 1.1 per cent this year, upwardly revised from a previous projection of 0.4 per cent.
“In addition to the economic downturn, the German economy is also being weighed down by structural change,” Geraldine Dany-Knedlik, head of forecasting and economic policy at DIW Berlin, one of the five institutions that regularly produce reports on the German economy, said.
“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.”
China has captured market share in some of Germany’s key industries, such as motor vehicle production, by manufacturing cheaper goods. Although supply in China is robust, demand has been constrained by a prolonged property crisis, which also is weighing on German exports.
European policymakers plan to erect trade barriers to blunt stiffer Chinese competition. Countries in the European Union will vote on whether to raise tariffs on Chinese electric vehicles from 10 per cent to as high as 35 per cent for five years. The United States has signalled that it will slap a 100 per cent levy on Chinese electric vehicles.
Inflation in Germany is tipped to average 2.2 per cent this year, down from 5.9 per cent in 2023, before stabilising at the widespread 2 per cent target in 2025 and 2026. Unemployment will average 6 per cent this year and next year before falling to 5.7 per cent in 2026.
The damaging effects of the European Central Bank tightening monetary policy has weighed on Europe’s consumers and businesses, keeping growth subdued on the Continent. Rates were lifted to a peak of 4 per cent, the highest level since the ECB was created more than 20 years ago.
However, the central bank of the 20 countries that use the euro has started to ease the restrictiveness of its policy, cutting its main deposit rate by 25 basis points at its June and September meetings. Further rate cuts are widely expected over the next year.