The German economy will almost certainly contract this year

According to leading economic institutes, the German economy will barely grow this year as weak demand at home and abroad slows the road to recovery, AFP reported.

Europe's biggest economy will expand just 0.1 percent in 2024, five think tanks said in a joint statement, a sharp drop from their earlier forecast of 1.3 percent growth.

"Cyclical and structural factors overlap in the slow overall economic development," said Stefan Cutz of the Kiel Institute for World Economics (IfW Kiel).

"Although a recovery will probably start from the spring, the overall dynamics will not be too strong," he added.

Germany's economy shrank 0.3 percent last year, hit by inflation, high interest rates and cooling exports, and is struggling to break out of stagnation.

Although inflation has been steadily falling in recent months, consumer spending is rising "later and not as dynamically" as previously forecast as wages lag, the institutes (DIW, Ifo, IfW Kiel, IWH and RWI) said.

And Germany's export sector, which is usually the main engine of economic growth, is suffering from the cooling of foreign trade in the conditions of an unstable global economy.

Energy-intensive businesses in particular were hit hard by the sharp rise in energy prices following Russia's war in Ukraine, which contributed to the decline in output in Europe's industrial powerhouse.

Meanwhile, corporate investment has been dampened not only by the European Central Bank's interest rate hike, which made borrowing more expensive, but also by "uncertainty about economic policy", the institutes said.

Criticism of Berlin comes after a shock court ruling late last year messed up Chancellor Olaf Scholz's budget and forced the government to rethink its spending plans.

The government also recently sharply lowered its own economic forecasts, expecting output to grow by just 0.2% this year.

Last month, Economy Minister Robert Habek admitted that the economy was in "turbulent waters" and needed "acceleration of reforms".

But Scholz's three-party coalition government, made up of the Social Democrats, the Greens and the liberal SDP, is divided over how to reverse the trend.

Calls have grown for the government to ease the constitutionally mandated "debt brake" - a self-imposed ceiling on annual borrowing - to speed up much-needed spending on infrastructure upgrades and the transition to a green economy.

Habek is in favor of easing debt rules, but Finance Minister Christian Lindner of the SDP is firmly against it.

The think tanks said they recommended "mild reform" of the debt brake to allow "more debt-financed investment than before".

Looking ahead, institutes expect the recovery to accelerate next year as inflation eases further and demand strengthens.

They now expect the economy to grow by 1.4% in 2025, down only slightly from their previous forecast of 1.5%. /BGNES