RWI Institute: German economy slowly regaining momentum

The RWI - Leibniz Institute for Economic Research has raised its forecast for German economic growth in 2024 slightly from 0.3 to 0.4 per cent and expects 1.5 per cent for 2025. The German economy is increasingly recovering, supported by exports and private consumption. The unemployment rate is expected to be 5.9 per cent in 2024 and 5.7 per cent in 2025. Inflation is expected to reach 2.4 per cent this year and fall to 2.0 per cent next year. The RWI expects a government budget deficit of a good 58 billion euros for the current year and a deficit of just under 60 billion euros for 2025.

The most important facts in brief:

• The RWI is increasing its forecast for German economic growth for 2024 slightly from 0.3 to 0.4 per cent compared to March of this year. For 2025, it expects 1.5 per cent instead of 1.2 per cent.
• The German economy has been recovering since the beginning of the year. It is receiving support from exports. They rose in the first quarter, which indicates that foreign trade is gradually picking up. The economic recovery is likely to gain some momentum in the coming quarters, even if uncertainties remain about how energy prices and economic policy will develop.
• Private consumption will probably still be dampened by the increased propensity to save in 2024. Given the high level of political and economic uncertainty, private households are saving significantly more than usual. However, their reluctance to consume should gradually decrease as real disposable incomes continue to rise. However, real private consumption is weaker than before the coronavirus crisis and the pre-crisis level is not expected to be reached until the third quarter of 2025.
• The development of the labour market appears to remain tense. Employment continued to rise in the first quarter and exceeded 46 million people in employment in Germany for the first time. However, the growth was only very small in a long-term comparison and was accompanied by a similarly large increase in registered unemployment.
• The labour market outlook is also gloomy. The number of people in employment is likely to continue to rise only slightly over the course of the year - by a total of 118,000 - before even falling in 2025 due to demographic trends. The strongest growth is likely to continue to be in employment subject to social security contributions, while only marginal employment is likely to decline from the middle of the current year and the number of self-employed people will probably continue to fall. The unemployment rate is expected to be 5.9 per cent this year and then fall to 5.7 per cent next year.
• The strong wage growth continued at the beginning of the year and the real wage loss resulting from the sharp rise in inflation over the past two years is gradually being offset. Collectively agreed and effective earnings (the actual gross earnings paid by employers to employees, which include benefits above and beyond the collectively agreed pay scale) are likely to rise sharply again overall in 2024. Next year - once the temporary losses in purchasing power have been largely offset - new agreements are likely to be significantly lower. On an annual average, collectively agreed wages are likely to rise by 4.8 per cent in 2024 and 2.7 per cent in 2025.
• The state budget deficit is expected to fall to a good 58 billion euros this year. The main reason for this is the abolition of the "electricity and gas price brakes", which will relieve the state coffers by around 30 billion euros.In addition, payments to companies suffering from particularly high energy prices will be cancelled.Government revenue will rise sharply, with income from social security contributions and wage tax likely to increase more than gross wages and salaries, which are already rising strongly. Government spending is likely to increase at roughly the same rate as nominal GDP.In 2025, the general government deficit is likely to be just under 60 billion euros.The percentage increase in revenue is likely to be lower and expenditure higher than in the previous year, as special effects that increase revenue and reduce expenditure will no longer apply.

Commenting on the outlook for the German economy, RWI head of economic research Torsten Schmidt says: "Following the recent economic shocks, the German economy has embarked on a course of recovery and the risks to the economy have diminished. Even if inflation trends, the green transformation of the German economy and possible international trade sanctions remain risk factors."

Source and Photo: RWI