Germany's economic growth forecast for the year has been halved to 0.5% by the DIW economic institute, primarily due to an energy price shock. Public spending is currently the main driver of the economy, while household demand weakens and companies grow cautious.
Germany's economic slowdown, driven by energy shocks and structural issues, signals broader challenges for the Eurozone's largest economy and could impact global growth dynamics.
Germany's economic growth forecast for the current year has been halved to 0.5% by the German Institute for Economic Research (DIW), primarily due to an energy price shock that is slowing the recovery.
DIW chief economist Geraldine Dany-Knedlik stated that while the situation is not as severe as in 2022/23, the energy shock is impacting growth. She highlighted that public spending, including increased defense expenditure and funds for infrastructure and climate neutrality, is the main driver of the economy. In contrast, household demand is weakening, and companies are adopting a more cautious approach.
The German government has also lowered its growth expectation to 0.5%, a figure consistent with the Kiel Institute for the World Economy's estimate. The DIW cautioned that fiscal policy impulses, while supportive, do not fully counteract the cyclical downturn and emphasized the need for swift disbursement of funds from special budgets.
Beyond the immediate cyclical issues, the DIW pointed to structural problems affecting Germany's competitiveness. These include a less competitive industrial sector, particularly the automotive industry, high production costs, and demographic changes, which collectively limit the economy's growth potential.
Internationally, the DIW forecasts that the United States, benefiting from its role as a major energy producer, will achieve growth rates above 2%, while the euro area faces a weaker outlook. Europe's reliance on energy imports makes it more vulnerable to price shocks, impacting energy-intensive industries. Expansionary fiscal policy is helping to cushion inflation but is not generating the desired growth, leaving consumers with less disposable income.