Germany's economy is increasingly described as 'stuck in stagnation,' with the Ifo Institute downgrading its growth outlook to zero for 2024, down from a previous forecast of 0.4%. This assessment reflects a broader trend of stagnation, as the economy is characterized by low investment and stagnating productivity. Timo Wollmershaeuser, an economist at the Ifo Institute, emphasized that these issues are compounded by an aging population and a shift towards a service-oriented economy [34faa347].
In September 2024, the Ifo Business Climate Index fell to 85.4 from 86.6 in August, indicating declining business sentiment. Carsten Brzeski from ING highlighted Germany as the growth laggard of the Eurozone, noting that the production PMI has been in contraction for over two years. This downturn is exacerbated by ongoing issues stemming from the cut-off of Russian oil and gas, as well as falling demand from China [6495acb7].
Germany's economic underperformance is further attributed to negative demographic trends, policy missteps, and a failure to adapt to digital changes. Real GDP growth has remained unchanged since Q4-2019, and the average economic growth is expected to be only 0.9% from 2022 to 2026, down from a pre-pandemic average of 2% [639ef502].
In the second quarter of 2024, Germany's economy contracted by 0.1%, following a 0.2% growth in the first quarter. This downturn was primarily driven by a 0.2% drop in private consumption and a staggering 2% decrease in investments. Brzeski remarked that the stagnation mirrors conditions from the previous year, raising concerns about overall economic stability [3a569e5f].
The manufacturing sector, a key pillar of the German economy, has seen significant declines, with industrial production contracting by 16% since 2017. Notably, automobile production fell by 28%, from 471,000 units per month in 2017 to 337,000 in 2024. Conservative fiscal policies have led to low public investment, which stood at only 2.6% of GDP in 2023 [639ef502].
The Ifo Institute's export expectations index has also declined, falling from -2.2 in July to -4.8 in August, indicating that German exporters are struggling to benefit from growth in other European markets. Klaus Wohlrabe, another economist at the Ifo Institute, pointed out that this trend is a clear sign of the difficulties faced by German exporters in the current economic climate [3a569e5f].
In contrast, Poland's economy has shown resilience, growing by 2% in the first quarter of 2024, following a 1% expansion in the last quarter of 2023. This divergence highlights the varying economic conditions within the region, with Poland benefiting from strong domestic demand and private consumption, while Germany's stagnation poses risks for the broader Eurozone economic outlook [70daa838].
As these economic challenges unfold, the focus will shift to how they influence future monetary policy decisions by the European Central Bank (ECB) and the potential for interest rate adjustments in response to the differing economic conditions across member states. Despite the current challenges, Brzeski predicts a slight improvement in the Ifo indicator by year-end, suggesting that there may be some hope for recovery [6495acb7].