Federal Bank Lowers German Economy Forecast Sharply Downward
The German economy is expected to grow by only 0.2% in real and calendar-adjusted terms in 2025, a significant downward revision from the 1.1% growth expected in June.
For 2026, the Federal Bank is now forecasting a 0.8 percentage point increase in economic output, down from 1.4% previously. And for 2027, the first forecast for that year, the bank is projecting a 0.9% increase.
For the current year, 2024, the central bank now expects a 0.2% decline in economic output, a downward revision from the 0.3% growth previously expected. Even for 2023, the forecast was revised downward, from 0.0 to -0.1%.
On a positive note, the Federal Bank is now also expecting a decline in inflation, with a 2.5% increase in the “harmonized” consumer price index for the whole of 2024, a 0.3 percentage point decrease from the previous forecast.
In 2025, prices in Germany are expected to rise by 2.4%, a 0.3 percentage point decrease from the previous forecast. For 2026, the inflation forecast is 2.1%, and for 2027, it is 1.9%.
The “core inflation” rate, which excludes energy and food, is expected to be 3.3% in 2024, an upward revision from the previous forecast of 3.1%. In 2025, the core inflation rate is expected to be 2.4%, and in 2026, 1.9%, a downward revision from the previous forecast of 2.5% and 2.3% respectively.
“The German economy is not only struggling with persistent cyclical headwinds, but also with structural problems” said Federal Bank President Joachim Nagel, citing the decline of the industry and its exports, as well as investment, as major issues. “The labor market is also starting to show the impact of the prolonged economic weakness” he said, adding that this would dampen private consumption, which would no longer be the driving force for economic recovery.
The bank’s experts expect a gradual recovery in exports, but also a delay in the recovery of business investments. “Private consumption is still rising, but not as strongly as previously expected” said Nagel.
The forecast is based on the assumption that the private sector will not be a major driving force for economic recovery, and that the labor market will continue to slow down, with a deceleration of wage growth, leading to a more cautious approach to consumer spending.
The bank’s president attributed the lower inflation forecast to two factors: the previous monetary tightening and the decline in the pressure of labor costs.
The state’s budget deficit is expected to decline slightly, from 2.6% in 2023 to 2.4% in 2027, as the effects of the energy crisis relief measures come to an end. However, other expenses, such as those for social security, interest, and defense, are expected to rise strongly. The debt-to-GDP ratio is expected to decline to 61.7% in 2027, from 62.9% in 2023.
The biggest uncertainty for the forecast is the potential for a global increase in protectionism, warned Nagel, citing the risks of geopolitical conflicts, the impact of structural changes, and the direction of future financial and economic policies after the federal election in February. “Overall, the risks currently outweigh the chances of a stronger economic growth and higher inflation” said the bank.