Stubbornly weak domestic and foreign demand, high interest rates and costly energy in the wake of Russia's war in Ukraine have all weighed heavily on the German economy
Stubbornly weak domestic and foreign demand, high interest rates and costly energy in the wake of Russia's war in Ukraine have all weighed heavily on the German economy AFP

The German government slashed its 2024 forecast Wednesday for Europe's largest economy, saying it will contract for a second straight year before a recovery gets under way in 2025.

Output is expected to shrink by 0.2 percent in 2024, the economy ministry said in a statement, a sharp downgrade from the 0.3-percent expansion previously forecast.

Germany's economy stalled in the first half of the year and a slew of disappointing indicators recently suggest "the economic weakness will persist into the second half of the year", it said.

Germany was already the only major advanced economy to fall into recession last year when it contracted by 0.3 percent, acting as a drag on the wider eurozone.

Stubbornly weak domestic and foreign demand, high interest rates and costly energy in the wake of Russia's war in Ukraine have all weighed heavily on the German economy -- particularly its crucial manufacturing sector.

At the same time, the country faces structural challenges including an ageing population, increased competition from China, burdensome bureaucracy and a complex green transition.

"Germany's structural problems are now taking their toll," Economy Minister Robert Habeck said.

"And this is happening amid major geo-economic challenges. Germany and Europe are caught in the middle of crises between China and the United States and must learn to assert themselves," he added.

Germany's woes were highlighted by a spate of bad news from the country's carmakers recently, as the flagship industry struggles with rising production costs and fierce competition from Chinese manufacturers on electric vehicles.

Volkswagen, Europe's biggest auto manufacturer, last month cut its annual outlook and said it would for the first time have to consider closing factories in Germany.

Rivals BMW and Mercedes-Benz have also lowered their outlook, citing falling Chinese demand.

The economy ministry nevertheless expressed confidence that a rebound was just around the corner.

Higher wages, easing inflation and lower interest rates are expected to encourage domestic consumption next year, the ministry said, while an improved global outlook should boost exports and industrial investments.

The economy is expected to grow by 1.1 percent in 2025, according to the latest forecasts, up from a previous estimate of one percent.

In 2026, output is predicted to expand by 1.6 percent.

Habeck said the government's proposed "growth initiative" had a key role to play in the anticipated economic revival.

The measures include tax breaks for companies making investments, reduced energy prices for industry, less red tape and incentives to keep older people in the workforce as well as to attract foreign skilled workers.

"The economy will grow more strongly," Habeck said, if the measures are "fully implemented".

Business associations have warned that the measures would not be enough.

The growth package is welcome "but nowhere near enough to truly get Germany back on track economically", Peter Adrian, president of the German Chamber of Commerce and Industry (DIHK), told the Rheinische Post newspaper.