German GDP expected to contract by 0.6% this year, economic institutes say

Five economic institutes are predicting gross domestic product (GDP) in Germany will contract by 0.6 per cent in 2023, as rising interest rates take their toll on the economy and high inflation depresses consumption. Growth of 0.3 per cent had been expected in the institutes' spring forecast. The forecast confirms the numbers Reuters previously reported exclusively earlier this week.

"The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected in spring," said Oliver Holtemoeller, vice president and head of the macroeconomics department at the Halle Institute for Economic Research (IWH).

Business sentiment has recently deteriorated again and overall, the indicators suggest that production fell noticeably in the third quarter of 2023, the economic institutes said.

GDP is expected to shrink by 0.4 per cent in the third quarter, following stagnation in the second quarter.

However, wage increases have followed the price hikes, energy prices have fallen, and exporters have partially passed on their higher costs, meaning that purchasing power is returning, economists said. Therefore, the downturn is expected to subside by the end of the year.

In the last quarter of the year, growth is forecast to pick up again, with a modest 0.2 per cent expansion.

For 2024, the institutes - four German and one Austrian - forecast GDP growth of 1.3 per cent, down from 1.5 per cent previously. For 2025, a 1.5 per cent GDP expansion is forecast.

In the following years, a decreasing potential growth rate due to the shrinking labour force will become more and more apparent, the economic institutes said.

Inflation is expected to be 6.1 per cent this year and fall to 2.6 per cent next year, according to the autumn forecasts. The inflation rate was at 6.9 per cent last year.

In 2025, inflation in Germany is expected to fall to 1.9 per cent. The institutes see core inflation at 6.1 per cent in the current year and 3.1 per cent in 2024.

The economics ministry usually updates its forecasts incorporating the results of the Joint Economic Forecasts. The Joint Economic Forecasts are prepared by the Ifo Institute, the Halley Institute for Economic Research, the Kiel Institute for the World Economy, the RWI – Leibniz Institute for Economic Research and the Austrian Institute of Economic Research.