German economy set to stagnate this year, Ifo institute says

[September 05, 2024]  By Maria Martinez

BERLIN (Reuters) -Germany's economy is likely to stagnate this year, the country's Ifo institute said on Thursday, abandoning its previous forecast of 0.4% growth.

"The German economy is stuck and is bobbing around in the doldrums, while other countries are feeling the upswing," said Ifo head of economic research Timo Wollmershaeuser.

The German economy contracted in the second quarter, sparking fears of another recession. A recession is defined as two consecutive quarters of economic contraction.

Asked whether he expects a recession, Wollmershaeuser said he deliberately avoids using the term.

He said Germany's economy is growing by half a percent per year at most, which means average growth on a quarterly basis of somewhere between 0.1% and 0.2% going forward.

"This means that we will very often find ourselves in situations where GDP is sometimes negative and sometimes positive, simply because of normal economic fluctuations," Wollmershaeuser said. "We can't talk about recession every time. I much prefer the term crisis"

In its updated forecasts, Ifo said it expects the economy to grow by 0.9% next year, below a previous 1.5% forecast, and by 1.5% in 2026.

Inflation has continued to fall this year and is expected at 2.2%, down from 5.9% in the previous year. It will continue its downward trajectory, falling to 2.0% in 2025 and 1.9% in 2026, according to Ifo's forecasts.

Despite easing inflation, consumption will remain weak, according to the institute.

A general view of the construction of Fehmarn Belt tunnel in Roedbyhavn, southern Denmark Thursday October 12, 2023. Ritzau Scanpix/Ida Marie Odgaard via REUTERS/File Photo

"The order situation is poor and the gains in purchasing power are not leading to increased consumption, but to higher savings because people are insecure," Wollmershaeuser said.

Germany's savings rate stands at 11.3%, significantly above the 10-year average of 10.1% before the pandemic.

Unemployment is likely to rise to 6.0% in 2024 from 5.7% in 2023. It will then fall to 5.8% next year and reach 5.3% in 2026, Ifo said.

Wollmershaeuser said Germany has a structural crisis. "Too little investment is being made, especially in manufacturing, and productivity has been stagnating for years," he said.

German industrial orders unexpectedly rose in July, but the increase was flattered by some large orders, making economists doubtful the sluggish sector was on the cusp of a sustained upturn.

Manufacturing output is set to decline by 2.0% this year compared to last year, according to Ifo's forecasts.

Decarbonization, digitalization, demographic change, the coronavirus pandemic, the energy price shock, and China’s changing role in the global economy are putting pressure on established business models and forcing companies to adjust their production structures, Wollmershaeuser said.

(Reporting by Maria Martinez, Editing by Miranda Murray and Christina Fincher)

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