Germany: Ifo Institute Lowers Growth Forecast

The Ifo Institute has revised its growth forecast for Germany for the current year. The researchers now expect the economy to stagnate, with no growth at all. In addition, the unemployment rate is expected to rise.

The Ifo Institute has lowered its growth forecast for the current year. It now predicts zero growth, down from the previously forecasted 0.4%. The institute has also cut its estimate for next year, projecting 0.9% growth instead of 1.5%. By 2026, the economy is expected to grow by 1.5%. „The German economy is stuck, stagnating in a slump while other countries are experiencing an upswing,“ said Ifo’s head of economic forecasting, Timo Wollmershäuser.

He added, „We are facing a structural crisis. There is too little investment, especially in the industrial sector, and productivity has been stagnant for years. On top of that, we are dealing with a cyclical downturn.“ The order situation is poor, and gains in purchasing power are not translating into higher consumption but instead into increased savings, as people are feeling uncertain.

Falling inflation, rising unemployment

According to the researchers, the savings rate now stands at 11.3%, well above the pre-COVID ten-year average of 10.1%. One small positive sign is the expected further decline in inflation. From an average of 5.9% in 2022, it is projected to drop to 2.2% this year, and then further to 2.0%. In the following two years, inflation is expected to settle at just 1.9%.

However, the unemployment rate is forecasted to rise: from 5.7% last year to 6.0% this year. In 2025, the Ifo Institute expects a slight decline to 5.8%, and by 2026, the rate should fall to 5.3%. The deficit in the state budget is expected to reach 2.0% of GDP this year, before decreasing to 1.3% and then 0.9% in the next two years.

Investment slump in the industrial sector

This year, the construction industry is projected to shrink by 3.1%, and industrial output by 2.0%. „Decarbonization, digitalization, demographic change, the COVID pandemic, the energy price shock, and China’s changing role in the global economy are putting pressure on established business models and forcing companies to adjust their production structures,“ Wollmershäuser explained. As a result, there is an investment slump, particularly in the industrial sector, which accounts for a significantly larger share of economic output in Germany than in other countries. „Additionally, the population is aging faster, meaning fewer people will be in the workforce. Shifts from the industrial sector to services largely explain the productivity stagnation of recent years,“ he added.

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