German Economy Minister Robert Habeck on Wednesday confirmed a revised outlook for Europe's largest economy, drastically lowering its growth expectation for 2024.

The economy has lurched between stagnation and recession in recent quarters, with Germany battered by what Habeck has described as "a perfect storm."

What the German government said

The German Cabinet has approved an economic forecast revising growth down to 0.2% this year — well below a previous forecast of 1.3%.

"We are coming out of the crisis more slowly than hoped," said Economics Minister Robert Habeck, presenting the report.

"The fact that the global economic environment is unstable and global trade growth is historically low is a challenge for an export nation like Germany,"

The government also forecast an easing of inflation in its report, from 5.9% in 2023 to 2.8% this year. Habeck, who is also Germany's vice chancellor, said inflation had been "tamed."

"Wage increases are noticeable and will be above the inflation rate this year," he said. "Employees finally have more real money in their wallets again, and purchasing power is increasing."

The German Bundesbank said earlier this week that economic output in Germany was set to fall again slightly in the first quarter of 2024, with the country therefore entering a technical recession after two consecutive quarters of negative growth. It cited widespread strikes, particularly affecting public transport, as a key contributing factor. However, it added that a "widespread and lasting decline" was not considered likely.

Vice chancellor urges more reforms, less infighting

However, Habeck did identify long-term "structural problems" such as a shortage of skilled workers, excess bureaucracy, and prolonged under-investment that needed to be tackled.

"It's about nothing less than defending the competitiveness of Germany as a location for industry," he said.

The minister also conceded that frequent public disputes among Germany's ruling coalition parties were unsettling for business.

Chancellor Olaf Scholz's three-way coalition — made up of the center-left Social Democrats, the Greens, and the most spending-averse Free Democrats (FDP) — is divided over how to boost the economy.

Habeck has urged investment in green industries through an easing of Germany's enshrined "debt brake," which limits borrowing. For the FDP, abandoning the brake is a red line.

Tensions over the brake spiraled in November when Germany’s Supreme Court ruled against the reallocation of a €60-billion ($65.3-billion) coronavirus pandemic fund towards green initiatives and industry support.

Why has Germany's economy been struggling?

Geopolitical uncertainty and lower global demand from markets such as China have been among the obstacles to recovery.

Germany's large industrial sector has also been particularly damaged by the loss of cheap Russian gas imports. Meanwhile, a string of interest rate rises by the European Central Bank — seeking to bring inflation into line — has stifled investment.

High inflation and reduced purchasing power, leading to lower domestic demand, have also proved to be a hurdle.

rc/msh (Reuters, AFP, dpa)

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