The economic forecast for Germany anticipates a 0.3% decline in economic activity in 2023. Factors contributing to this downturn include reduced purchasing power due to high inflation and tightened financing conditions, impacting consumption and investment. Additionally, foreign demand has not met previous expectations, resulting in a worsened trade outlook. However, a recovery is expected in domestic demand, driven by an increase in real wages. This, along with improved foreign demand, is projected to support a GDP growth of 0.8% in 2024 and 1.2% in 2025. Public finances are moving towards fiscal consolidation, marked by decreasing government deficits and debt-to-GDP ratios. The German economy has faced challenges throughout 2023, with industrial production declining, private consumption impacted by inflation, and reduced export volumes due to weakened economic conditions in key trading partners.
As inflation eases and household income increases, investments and private consumption are expected to recover to pre-pandemic levels. Construction is set to grow in the second half of 2024, driven by high housing demand. However, elevated energy costs may hinder a more dynamic recovery, particularly in energy-intensive industries. With stabilization in demand from trading partners, net trade is projected to be broadly neutral in 2024 and mildly positive in 2025, leading to an increase in current account surpluses.
The employment rate rose by 0.8% in the first eight months of 2023 compared to the same period last year. The labor market remains tight, with an unemployment rate of around 3%, expected to increase slightly to 3.2% over the forecast horizon. Despite a slight softening, the job vacancy rate remains high. Real wage growth is expected to continue in 2024 and 2025, benefiting from higher wage outcomes. Inflation, measured by HICP, is anticipated to decelerate to 3.1% in 2024 and 2.2% in 2025, influenced by steady wage growth and a relatively minor contribution from energy prices.
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The general government deficit is projected to decrease to 2.2% of GDP in 2023, supported by the phase-out of COVID-19 pandemic measures and a favorable development in energy prices. The Economic Stabilisation Fund of EUR 200 billion is expected to contribute around 1.0% of GDP to finance electricity and gas price brakes in 2023. In 2024, the government deficit is anticipated to further decrease to 1.6% of GDP, supported by the phase-out of energy measures and a robust development of government revenue. However, various tax measures aimed at addressing inflation-related issues, supporting families, and enhancing growth opportunities for companies may negatively impact government revenue. In 2025, the government deficit is projected to narrow further to 1.3% of GDP.