The German Economy Ministry expects the economy to shrink in 2024 for the second year in a row, now forecasting a 0.2% contraction instead of its prior estimate of 0.3% growth, a major newspaper reported on Sunday.

"Instead of gaining momentum, the economy continues to be characterized by a general reluctance by consumers to spend," the Süddeutsche Zeitung said.

But the government had a more optimistic outlook for the coming years, the daily said, with the ministry to announce on Wednesday that it expects 1.1% growth next year, up from 1% in the previous forecast.

By 2026, the economy is expected to expand 1.6%, the paper said.

Sluggish recovery

In 2023, Germany was the only major advanced economy to contract as it reeled under the effects of an industrial slowdown, fewer export orders and soaring energy prices as a result of Russia's invasion of Ukraine.

There were hopes that dropping inflation and interest rate cuts by the European Central Bank might buoy up the economy once more this year, but weak demand at home and abroad largely negated those positive factors.

The government's pessimistic outlook is shared by Germany's leading economic institutes, which have also recently lowered their forecasts and predict either stagnation or a 0.1% contraction this year.

They are even more cautious in their forecasts for the next two years, reducing their growth estimate for 2025 to 0.8% from a previous 1.4%, and predicting growth of just 1.3% in 2026.

Compounding Germany's economic woes, the country is also facing challenges such as growing competition from China, a skilled-worker shortage and  problems associated with the transition from fossil fuels to renewable energries.

Plans for growth

Economy Minister Robert Habeck told the Süddeutsche Zeitung that the government's proposed "growth initiative" would play a major role in bringing about an economic recovery.

The measures foreseen by Berlin include tax relief, the reduction of energy prices for industry, slimmed-down bureaucracy, incentives to older people to continue working and more attractive conditions for foreign skilled workers.

"The German economy can grow significantly stronger in the next two years if the measures are fully implemented," Habeck was quoted as saying.

tj/rm (AFP, Reuters)

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