Due to the great economic uncertainties in Germany, the Munich-based Ifo Institute is currently not willing to commit to a precise economic forecast for next year. Instead, it has calculated two scenarios, the institute said on Thursday.
If the German economy fails to overcome its structural challenges, only a 0.4% growth is expected. However, if the “right economic policy decisions” are made, a 1.1% growth could be achieved in 2025. “At the moment, it’s still unclear whether the current stagnation phase is a temporary weakness or a lasting and thus painful change in the economy” said Ifo Chief Economist Timo Wollmershäuser.
According to the economist, the poor order book, which has also been influenced by the tight monetary policy in Europe and many German domestic markets, is currently a major concern. However, purchasing power has recently returned, and the inflation pressure will also continue to decline in Germany, Wollmershäuser said. The institute expects a 2.3% and 2.0% inflation rate for the next year and 2026, respectively.
“The key will be whether the export-oriented German economy can again benefit from growth in other countries” the economist said. The institute forecasts a 1.2% growth in the euro area, 4% in China, and about 2.5% in the US for the next two years.
Until recently, the German goods export, according to Wollmershäuser, has increasingly decoupled from the global economic development, particularly in the industry, and particularly outside of Europe, Germany has noticeably lost competitiveness.
In the more pessimistic scenario, this weakness leads to a gradual deindustrialization. Industrial companies relocate production and investments abroad. Due to the structural change away from industry towards more services, the productivity growth remains weak, with a temporary increase in unemployment to be expected. Gentle growth impulses come from a slow recovery of private consumption and the construction industry.
In the more optimistic scenario, a “reliable economic policy” contributes to industrial companies expanding their production capacities again and investing more, and less laying off workers, thanks to fiscal incentives. In this scenario, the labor market incentives will also improve, with more people working and individuals extending their working hours. This would in turn strengthen private consumption and lead to a decline in the savings rate.