Germany facing economic stagnation – central bank

GDP is forecast to decline by 0.2% this year, a sharp downgrade from Bundesbank’s previously projected 0.3% expansion

Germany’s central bank has slashed growth outlook for the EU’s largest economy, projecting that it will contract this year and will hardly grow at all in 2025, amid deepening structural problems.

In its monthly report, released on Friday, the Bundesbank said GDP is expected to shrink by 0.2% this year due to a more persistent weakness in the industrial sector. The forecast is a sharp downgrade of a previously projected 0.3% expansion.

The industrial sector weakness is now largely considered to be structural and is putting a strain on export business and investments, the central bank said. The labor market is also affected, which in turn is dampening private consumption, the report noted.

“Against this backdrop, the German economy is set to stagnate in the winter half-year 2024-25 and only begins to make a slow recovery over the course of 2025,” the Bundesbank said.

Output is set to increase by 0.2% next year, compared to the previously projected 1.1%. For 2026 and 2027, the Bundesbank forecast growth of 0.8% and 0.9%, respectively.

“The German economy is struggling not just with persistent cyclical headwinds but also with structural problems,” Bundesbank President Joachim Nagel said in the report.

He cited uncertainty surrounding geopolitical conflicts, the impact of structural changes and the orientation of future fiscal and economic policy following the Bundestag elections in February. “All in all, the prevailing risks at present are of even weaker economic growth and higher inflation,” Nagel said.

The report said that domestically producing industrial firms should adjust to the longer-term effects of the energy price crisis triggered by the Ukraine crisis, as well as the requirements of the green transition, and the consequences of demographic change, among other issues.

Bundesbank also warned that a potential trade war with the US could push the German economy into recession. If President-elect Donald Trump follows through on his threat of imposing blanket tariffs on all imports to the US, it could slash between 0.2 and 0.6 percentage points off German GDP next year, the Bundesbank said.

The Eurozone’s largest economy has been falling behind its peers in recent years, largely due to a prolonged manufacturing downturn. Germany was the only Group of Seven economy to contract in 2023.