The German government predicts a 0.4% contraction in the country's economy for the current year.

12 Oct, 2023

The German government predicts a 0.4% contraction in the country's economy for the current year.

Germany's government announced on Wednesday that it anticipates a 0.4% contraction in the country's economy for this year, aligning itself with a series of other forecasters who have significantly revised down their expectations for Europe's largest economy.

This adjusted forecast stands in stark contrast to the 0.4% growth projection made by the government in late April. The Economy Ministry conveyed in a statement that "the effects of the energy price crisis, combined with global economic fragility, are exerting a more sustained drag on the German economy than initially estimated in the spring."

On Tuesday, the International Monetary Fund (IMF) projected a 0.5% decline for the German economy. In the previous month, a consortium of leading German economic think tanks foresaw a contraction of 0.6%.

The government's outlook foresees a gross domestic product (GDP) increase of 1.3% for the next year and 1.5% in 2025, partly driven by a decrease in inflation. Inflation is anticipated to average 6.1% for the current year, but decrease to 2.6% in the following year and further to 2% by 2025. The Economy Ministry expressed expectations for the economy to show signs of improvement around the turn of the year, followed by acceleration, with a boost coming from the recovery in consumer demand. The ministry also acknowledged that the "necessary combatting of inflation" by the European Central Bank, leading to higher borrowing costs, has been a contributing factor to Germany's economic challenges.

Germany has been grappling with additional issues, including an aging population, limited adoption of digital technology in both businesses and government, excessive bureaucratic obstacles hindering business startups and public construction projects, and a shortage of skilled labor.

Last month, Chancellor Olaf Scholz, whose government is contending with low approval ratings and a reputation for internal disputes, called on Germany's opposition and regional governments to collaborate in simplifying a "tangle of bureaucracy."