Cutbacks hit growth of German economy

Germany's gross domestic product is projected to grow by a meager 0.7 percent in 2024, which is lower than the previous forecast of 0.9 percent, according to the Institute for Economic Research (Ifo), a Munich-based economic think tank.

In light of a funding shortfall and the German government's significant cuts to the 2024 budget, Ifo has revised its projections from mid-December.

"According to our estimate, the federal budget now agreed by the budget committee made cutbacks to the tune of some 19 billion euros ($20.6 billion)," said Timo Wollmershauser, senior economist at Ifo. "Businesses and households will come under more strain or receive less relief, and public spending will be reduced."

Wollmershauser said the extent of spending reductions or tax increases had not been clear in December when the previous prediction was made, reported Deutsche Welle News.

Germany's economy contracted by 0.3 percent last year under the impact of higher interest rates and increased energy costs, and economists have warned the industrial powerhouse is at risk of a two-year recession.

Carsten Brzeski, an economist at the bank ING, said Germany "seems to have been in permanent crisis mode". He said the list of crises and challenges facing the German economy was long, including supply chain frictions resulting from pandemic lockdowns and Russia-Ukraine conflict, an energy crisis, surging inflation, tightening of monetary policy, and several structural shortcomings.

Brzeski added: "There is no imminent rebound in sight and the economy looks set to go through the first two-year recession since the early 2000s."

In November, the German government had to reduce its spending as a result of a ruling by the constitutional court, which stated that 60 billion euros ($64 billion) in unused COVID-era loans could not be reallocated, said DW.

The forecast by Ifo was more optimistic than other institutions, including the Macroeconomic Policy Institute, which predicts a 0.3 percent contraction in GDP for 2024.

According to Eurostat figures, industrial production in Germany experienced a 0.3-percent decline in November compared to October, with output down 4.9 percent compared to the same month in 2022.

Quoted in the Daily Telegraph newspaper, Andrew Kenningham, at Capital Economics, said little relief is expected in 2024, and he forecast zero GDP growth.

"The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year," he said. "Admittedly, the recent fall in inflation should provide some relief for households, but residential and business investment are likely to contract, construction is heading for a steep downturn, and the government is tightening fiscal policy sharply."