German consumers boosting spending aids economic recovery
Over the last two years, the German economy has faced challenges. The German central bank, Bundesbank, predicts a slow recovery starting this year, partly due to happier consumers. Economic Minister Habeck even anticipates increased growth in 2025.
The Bundesbank predicts a gradual recovery for the German economy after a recent period of weakness. This improvement is due to rising private consumption and better export business from the second half of the current year.
German households are benefiting from increasing wages, a decrease in inflation, and a stable job market, said Bundesbank President Joachim Nagel in the institution’s latest six-month forecast. Germany saw a 0.2% growth in the first quarter largely supported by exports and more construction investments.
The Bundesbank projects a 0.3% growth in Germany's economy for all of 2024. There was a forecast of 0.4% growth for real GDP in December, but this has been revised down. They expect a slightly stronger growth rate - 1.1% in 2025 and 1.4% in 2026.
Inflation is gradually decreasing
Inflation in Germany has been decreasing at a slower pace than initially predicted. The Bundesbank now anticipates an inflation rate of 2.8% for this year and 2.7% for 2025, using the European method (HICP). The December forecast had lower figures: 2.7% for 2024 and 2.5% for 2025. The Bundesbank's inflation forecast for Germany in 2026 remains unchanged at 2.2%.
The Bundesbank stated that energy and food prices have decreased significantly this year. But inflation is proving tough to control, particularly in the services industry, where rapidly rising wages and resulting cost pressures play a big part.
The ECB is aware of inflation risk
The European Central Bank (ECB) aims for a medium-term price stability target of a 2% annual inflation rate for the entire euro area. Higher inflation rates reduce the purchasing power of consumers. They can then afford less for a euro. Nagel confirmed after the ECB council's decision to lower interest rates that a careful approach will be taken for future rate cuts: "We are not on autopilot when it comes to interest rate cuts in the ECB council."
As for the ECB, the goal is medium-term price stability with a 2% annual inflation rate for the entire euro area. Higher inflation can reduce the purchasing power of consumers, making them able to buy fewer goods for their money. Nagel said after a council meeting to reduce interest rates that the reduction in rates won't be done automatically.
Meanwhile, German Federal Economic Minister Robert Habeck expects more growth in 2025. If everything goes smoothly, the growth could be between 1- 1.5%. His prediction in April was 1% for 2025.
Habeck pinned the last two years’ challenges largely on the consequences of Russia's attack on Ukraine - such as momentarily skyrocketing energy prices and ongoing high inflation. "Now, we have this problem under control," he added.
Read also:
- Economic Minister Habeck is hopeful about a significant increase in growth for 2025, despite the challenges faced over the past two years, as he believes the German economy will continue its gradual recovery, following the Bundesbank's growth forecast.
- The Bundesbank recently revised its inflation prediction for 2025, with an anticipated rate of 2.7%, which is slightly higher than the 2.7% projected for 2024. This revision follows a gradual decrease in inflation over the years.
- Despite the Bundesbank's revised inflation forecast for 2025, Robert Habeck, the German Federal Economic Minister, remains optimistic about the overall economic growth, stating that the German economy is now successfully managing the consequences of Russia's attack on Ukraine and the associated challenges, such as high inflation and volatile energy prices.
