The Organization for Economic Cooperation and Development (OECD) has once again lowered its economic forecast for Germany. The OECD now predicts that Germany’s gross domestic product (GDP) will grow by only 0.7% in 2025, down from a previous forecast of 1.1%. The OECD has lowered its economic forecast for Germany, predicting a slower growth rate compared to the global economy, which is expected to grow by 3.3% next year.
Several factors contribute to this revised forecast:
High Uncertainty: Concerns about financing and implementing climate-friendly production have lowered confidence among investors and consumers in Germany.
Weak Foreign Demand: Economic activity has been weighed down by weak demand from key trading partners.
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Slow Recovery in Exports: Although exports are slowly recovering, they have not yet reached levels that would significantly boost economic growth.
According to OECD reports, low inflation and rising wages will support real incomes and private consumption. Private investment will gradually pick up, supported by high corporate savings and slowly declining interest rates, but policy uncertainty will continue to weigh on investor confidence. Exports will slowly recover as demand in key trading partners strengthens.
Increasing public spending efficiency, reducing environmentally harmful tax expenditures, and enhancing tax enforcement should be combined with more flexibility in the national fiscal rules to create fiscal space to address a large infrastructure backlog and support green and digital investments.
Continuing to reduce the administrative burden, digitalize the public administration and improve infrastructure implementation capacity, particularly at the municipal level, can do much to support a pick-up in public and private investment. Skilled labour shortages can be addressed by strengthening the work incentives of women, older workers and low-income earners, as well as improving education, training and adult learning policies.
After GDP had decreased by 1.1% (annualized rate) in the second quarter 2024, it picked up by 0.4% in the third quarter driven by private and public consumption. High uncertainty about the financing and design of measures to support the green transition is weighing on investor and consumer confidence. Industrial production was 4.6% lower in September than a year earlier.
Despite falling energy prices, output of energy- intensive industries was 2% lower in September than a year earlier and volatile car production declined after a strong increase in August. However, incoming manufacturing orders have significantly picked up in September (+4.2%). Annual headline inflation increased to 2.4% in October, up from 1.8% in September, mainly driven by increases in food as well as services prices.
Core inflation remains sticky at 3.3% in October, up from 3.0% in September, due to strong services price inflation of 4.8% in October. Nominal wages per employee increased by 5.1% in the third quarter of 2024 from a year earlier, pushing up real wages and supporting a recovery in retail sales volumes from July to September. Although labour markets show some signals of cooling, they remain robust with a stable unemployment rate and high vacancies relative to historical norms, still signalling strong labour shortages.
After increasing in both July and August, export values declined in September by 1.7%. Exports to non-EU countries declined further in October and remain 6.5% below the level in October 2023, mainly due to weak exports to China and the United States. However, export orders have rebounded in recent months due to a broader recovery in global demand.
Despite these challenges, the OECD expects growth to rebound to 1.2% in 2026. The organization also highlights that low inflation, and rising wages will support real incomes and private consumption, which could help stabilize the economy.
A Russian ship in the Baltic Sea reportedly shot signal ammunition at a German military helicopter, highlighting ongoing tensions in the region. Former German Chancellor Angela Merkel mentioned that Russian President Vladimir Putin’s actions regarding Crimea were a turning point in her perception of him.
There is an ongoing international police operation targeting people smugglers transporting migrants to the UK via France, with raids taking place in western Germany. German companies operating in China are facing a slump in business confidence due to economic challenges and operational hurdles.