Financial Institutions: Prolonged Economic Downturn Caused by Negative Attitude
German financial experts have dismissed the likelihood of an economic recovery this year. The nation is experiencing a slump. The federal government must act promptly and take charge. A prolonged period of inaction until the elections would be too costly for Germany.
According to top economists from private banks, the German economy is anticipated to see a gradual recovery only in the following year. As reported by the German Banking Association (BdB), private banks now forecast a plateauing of overall economic performance in 2025, with a 0.7% increase in the country's gross domestic product (GDP). Initially, they had projected a 1.2% growth rate for 2025, following a stagnant period this year.
The economic recovery is projected to be gradual in 2025, fueled by rising real wages and a slight decrease in the savings rate of households. However, economists anticipate that external stimuli will remain weak in the coming year. "Consumer spending projections have been disappointing this year. Additionally, corporate investments have declined more sharply than expected," remarked Heiner Herkenhoff, CEO of the BdB.
Herkenhoff attributed this to the general malaise in the country. "Consumers are uncertain about the future economic growth. They are holding back on spending and saving more instead, despite rising real wages. Companies' investment readiness is also suffering from the pessimistic outlook," he stated.
The BdB urged politics to take further steps to significantly enhance Germany's economic competitiveness and investment climate. The federal government must not only swiftly and comprehensively execute the growth initiative but also send clear signals to spur activity. "We cannot afford an economic standstill until the federal elections next year," said Herkenhoff.
"A half-decade of lost opportunity"
The day prior, the Institute for Macroeconomics and Economic Research (IMK) also revised its forecasts downward and now aligns with the BdB's predictions. "At first glance, this might not sound alarming. But the extended period of weak growth has significant consequences," said Sebastian Dullien, the institute's scientific director, mirroring the sentiments of the trade unions. "By the end of 2025, the gross domestic product will be at the same level as it was at the end of 2019." In the USA, it has now increased by almost 10% since before the coronavirus pandemic. In the rest of the eurozone, including countries like Italy or France, it has climbed by at least 5%. "This means that Germany has lost out on nearly a half-decade of opportunity," the economist lamented.
The current stagnation is a result of weak foreign demand, a restrictive and inconsistent fiscal policy from the federal government, and a still too conservative monetary policy from the European Central Bank (ECB) despite initial interest rate cuts. For the next year, the IMK also detects glimmers of hope through increasing nominal wages, decreasing inflation, and increased private consumption.
The IMK emphasized that the prolonged slump is also a symptom of changing global economic conditions, requiring a corresponding adjustment in economic policy. "In the past, the German economy has typically rebounded from economic downturns through exports," said the IMK. However, the chances for this are currently slim, also due to assertive industrial policies from significant trading partners like China and the USA.
"In this situation, we need a shift in Germany's economic policy, involving extensive and continuous investments, for example, in renewable energy, networks, transportation infrastructure, and education," said IMK Director Dullien.
The gradual economic recovery predicted for 2025 by private banks might still be insufficient to match the GDP levels achieved before the pandemic in other major economies, such as the USA and parts of the eurozone. The prolonged slump in the German economy, resulting from various factors, has led to a significant loss of growth opportunities for nearly half a decade.
