The German economy, the largest in Europe, continues to grapple with the aftermath of multiple crises and persistent high inflation, hampering its recovery prospects. The Bundesbank, in its recent biannual update, revised its projections, painting a challenging outlook for the country’s economic performance. Despite the European Central Bank’s tightening measures and efforts to combat inflation, the German economy is expected to contract this year and face sluggish growth in the coming years.
The Struggle with Inflation
According to the Bundesbank’s forecasts, inflation in Germany is projected to remain above 2% until at least 2025. While the European Central Bank’s recent interest rate hikes aimed to curb inflationary pressures, the German economy continues to battle high inflation levels. The central bank predicts an inflation rate of 6.0% this year. Although price growth is expected to decelerate in the following years, with projections of 3.1% in 2024 and 2.7% in 2025, the risks of persistent inflation persist. Rising wages and profits could further entrench inflation, necessitating decisive monetary policy action.
Growth Projections and Challenges
The Bundesbank’s latest projections indicate a contraction of 0.3% in the German economy this year, a more pessimistic forecast compared to the European Commission’s projection of a 0.2% expansion. However, this is a slight improvement from the Bundesbank’s own estimate six months ago, which predicted a 0.5% contraction. The central bank expects growth rates of 1.2% in 2024 and 1.3% in 2025, both below previous forecasts. The protracted recovery is attributed to the lasting impact of the past three years’ crises, including the decline in gross domestic product during the winter recession.
The Impact of Inflation and Competitiveness
The consequences of high inflation in Germany are hindering the recovery process, leading to a reduction in citizens’ purchasing power, as emphasized by Bundesbank President Joachim Nagel. Despite slight improvements in the economy this year, the decline in GDP in the previous winter half-year contributed to the sluggish recovery. Also of note, factors such as increased interest rates and decreased competitiveness are anticipated to weigh on economic growth in 2024 and 2025 compared to previous projections.