FRANKFURT - Germany's economy is projected to contract for the second consecutive year, with Bundesbank President Joachim Nagel indicating that recovery will be sluggish. The downturn is exacerbated by a potential trade war with the United States.
The country, the largest in the euro zone, has faced challenges due to reduced access to affordable Russian energy and a decline in demand from China for its exports. The Bundesbank now forecasts a 0.2% contraction for 2024, revising its earlier prediction of a 0.3% growth.
Economic stagnation is expected to persist through the winter, with private consumption growth anticipated to be lower than previously expected. Additionally, the labor market may weaken further, and business investments are likely to recover slowly.
Nagel stated that the German economy is grappling not only with ongoing economic challenges but also with structural issues. He noted that the labor market is responding noticeably to the prolonged economic weakness.
The Bundesbank has also revised its growth outlook for 2025 down to 0.2% from 1.1%, cautioning that these figures could be overly optimistic given rising protectionism and geopolitical tensions.
Simulations indicate that increased tariffs from the U.S. could result in a 1.3% to 1.4% loss in Germany's output by 2027. While inflation is expected to rise slightly, the extent remains uncertain.
The Bundesbank highlighted that risks to economic growth are tilted to the downside, while inflation risks are skewed upward. Upcoming federal elections may further influence the fiscal outlook.
This ongoing economic weakness has prompted the European Central Bank to lower interest rates, with indications of potential further easing as inflation concerns recede and the focus shifts to stimulating growth.