State of the economy in Europe: Once a growth engine: Brussels lowers forecast for Germany

According to a forecast by the EU Commission, Germany’s economy will shrink slightly this year. In an estimate presented in Brussels, the authority of the EU’s largest economy predicts a decline in gross domestic product (GDP) of 0.1 percent this year. Across Europe, the Commission expects growth to be somewhat slower than recently: For 2024, the experts expect the economy of the international community to grow by 0.9 percent – after an increase of 1.0 percent expected in May. The authority continues to forecast an increase of 0.8 percent for the euro zone.

“After the stagnation we had in 2023, the European economy is growing again,” said EU Economic Commissioner Paolo Gentiloni when presenting the autumn forecast. However, growth remains modest and is exposed to significant downside risks. “The outlook remains highly uncertain,” Gentiloni continued. He referred, for example, to Russia’s ongoing war of aggression against Ukraine, the conflict in the Middle East and increasing environmental risks, as shown by the recent floods in Spain.

Weak growth engine

For a long time, Germany was the engine of growth in Europe – but that is no longer the case. It would now be the second year in a row that the German economy has contracted, following a decline of 0.3 percent last year. The reasons cited for the decline include weak demand for industrial products, high levels of uncertainty, labor shortages and a high savings rate among consumers due to poor consumer mood. In its previous forecast in May, the EU Commission had assumed minimal growth of 0.1 percent in Germany for 2024.

In a European comparison, only Estonia (-1 percent), Ireland (-0.5 percent), Austria (-0.6 percent) and Finland (-0.3 percent) are forecast to see their GDP shrink this year. Brussels expects an increase in other large economies such as France (1.1 percent) and Spain (3 percent).

The German Council of Experts for assessing overall economic development also recently lowered its estimate and predicts that the German economy will shrink by 0.1 percent this year. For the coming year he only expects a mini-plus in gross domestic product of 0.4 percent; the EU Commission is expecting an increase of 0.7 percent.

Growing uncertainty after traffic lights go out?

The federal government lowered its economic forecast in October and expects economic output to decline by 0.2 percent in 2024. One reason is uncertainty among companies and citizens who are holding back on investments. This could now increase further after the traffic light failed. Berlin expects growth of 1.1 percent for the coming year. The federal government is also relying on a planned growth initiative with, among other things, tax relief. Whether this will be implemented, at least in part, by the end of the year remains completely open after the government collapse.

The weak economy in Germany continues to have an increasing impact on the labor market. The number of companies is declining and pessimism among companies is increasing, according to data from the Federal Statistical Office.

Commission expects a plus next year

For the coming year, Brussels is still expecting an increase in the economy of the international community of 1.5 percent, as well as an increase of 1.3 percent in the euro zone. For 2026, the Commission is increasing the forecast a little further and expects an increase of 1.8 percent in the EU and 1.6 percent in the euro zone. For Germany, the EU Commission currently expects gross domestic product to grow by 1.3 percent in 2026.

According to the Commission’s estimate, annual inflation in the euro zone will more than halve to 2.4 percent this year from 5.4 percent in 2023. Experts expect it to weaken further in 2025 (2.1 percent) and 2026 (1.9 percent).

Geopolitical challenges for Europe are growing

Relations with the important trading partner USA under future President Donald Trump represent a further challenge for the EU. Just last week, EU heads of state and government described it as a top priority to avoid an economic war with the United States. During the election campaign, Trump announced that he wanted to introduce new tariffs of 10 to 20 percent on imports in order to strengthen the USA as a production location. “The Commission will work with the new US administration to advance a strong transatlantic agenda and ensure that international trade channels remain open while becoming more secure,” said Gentiloni.

The EU is also involved in a stressful trade dispute with China. Additional tariffs have been in effect for electric cars imported from China since the end of October. From the Commission’s point of view, they are necessary to secure the long-term future of the auto industry in the EU. The government in Beijing accuses the EU of protectionism and has in the past threatened, among other things, higher tariffs on the import of large-displacement combustion engines from the EU into the People’s Republic. German car manufacturers would be particularly affected by this.