GDP threatens to shrink again in 2024 - IMK expects decline of 0.3 per cent, the same as in 2023

Cuts in government spending, higher taxes and additional uncertainty regarding further funding for climate protection projects are likely to intensify the dampening effect of high interest rates and subdued global economic growth. As a result, gross domestic product (GDP) will fall by an annual average of 0.3 per cent in 2024. This would be a similar decline to 2023, according to the Hans Böckler Foundation's Institute for Macroeconomics and Business Cycle Research (IMK) in its new economic forecast. With inflation continuing to fall, private consumption will recover somewhat in the coming year. However, this positive development will not be able to compensate for negative stimuli from construction, capital investment and foreign trade. If this scenario continues, unemployment will rise noticeably by just under 240,000 people on average in 2024 to 6.2 per cent after an average of 5.7 per cent in 2023. The inflation rate will still average a high 5.9 per cent in 2023, but will continue to fall significantly in the coming year and, at an annual average of 2.5 per cent, will once again be relatively close to the inflation target of the European Central Bank (ECB).

Compared to its previous forecast from September, the IMK assumes that GDP will shrink slightly less in 2023 - by 0.3 per cent instead of 0.5 per cent. This revision for 2023 is primarily due to the fact that the Federal Statistical Office has subsequently revised the data for the quarters in the first half of the year slightly higher. By contrast, the economic experts have significantly lowered their forecast for 2024 by 1.0 percentage points, from 0.7 per cent growth to 0.3 per cent decline. New figures from the IMK economic indicator underline the gloomy outlook: For the three-month period until the end of February 2024, the instrument signals a recession risk of just under 70 per cent.

"The draft budget presented by the German government as a compromise is not a brutal austerity budget. However, it cuts spending in various areas and includes tax increases. All of this has negative effects on growth," says Prof Dr Sebastian Dullien, Scientific Director of the IMK.

In addition, the judgement of the Federal Constitutional Court and the government's reaction to it have fuelled uncertainty among companies and private households, which is also weighing on growth. "The budget freeze from November, the cancellation of previously promised relief, such as grid fees, and the fact that projects ranging from chip funding to subsidies for investments that have already begun, such as battery cell production, have been called into question by the public in the meantime, calls into question the reliability of German politics from the perspective of many companies," continued Dullien. "It would have been better if the German government had immediately re-declared the emergency situation under Article 115 of the Basic Law due to the economic consequences of the Russian attack on Ukraine and the resulting massive energy price shock and refrained from making cuts."

"Do not manoeuvre into a stubborn economic weakness without necessity"

In view of a relatively low national debt ratio in international comparison and budget deficits that are moderate even in the current weak economy - the IMK forecasts a deficit of 1.6 per cent of GDP for 2023 - "we must be careful not to manoeuvre ourselves into a stubborn economic weakness without need," warns the IMK Director. "It is now also becoming clear how unsuitable the debt brake is for the challenges of the current period. Instead of simply being able to draw up a budget that is appropriate to the economic and transformative challenges, there are now long discussions about possible explanations for emergency situations," says Dullien. Following the current budget compromise, it is now important to create room for manoeuvre and planning security for the years after 2024. "One conceivable option would be to set up a special fund to ensure the necessary public investment for the coming decade."

Labour market

The weak economic momentum is severely slowing the development of employment. The number of people in employment will still increase by an annual average of 0.8 per cent in 2023, but will fall by 0.1 per cent in 2024. At the same time, unemployment will rise. The IMK is forecasting an annual average increase in unemployment figures of just under 200,000 people in 2023, meaning that around 2.61 million people will be unemployed on average over the year. This corresponds to a rate of 5.7 per cent, an increase of 0.4 percentage points compared to 2022. For 2024, the researchers estimate a further increase in unemployment to 2.85 million people and a rate of 6.2 per cent.

Global economy and foreign trade

The global economy is growing at a very subdued pace, with high global interest rates contributing significantly to this. GDP growth in the USA will slow from 2.4 per cent in 2023 to 1.3 per cent in 2024, while economic growth in the eurozone, which is already low, will fall from 0.5 per cent this year to 0.4 per cent next year. This means that German exports will only receive weak impetus from important trading partners. German exports will fall by an annual average of 2.3 per cent in 2023. Nevertheless, foreign trade will make a small positive contribution to growth on balance because imports will fall even more sharply on an annual average: by 3.0 per cent. In 2024, exports will fall slightly by 0.1 per cent, while imports will increase minimally by 0.1 per cent.

Investments

According to the IMK forecast, investment in equipment will remain robust in 2023 and increase by an annual average of 3.9 per cent. However, the positive trend will break off in the coming year: investment in equipment will only grow minimally by 0.1 per cent, partly because companies will hold off on spending as long as there is uncertainty about the course of public investment. Construction investment continues to slump due to higher costs and interest rates. After a decline of 1.8 per cent on average in 2023, it will even fall by an annual average of 5.1 per cent in 2024.

Private consumption

Strong inflation will put pressure on real incomes this year, even though nominal wages will develop noticeably more strongly than in previous years due to higher collective wage agreements. The IMK then expects real wage gains again in 2024 with lower inflation. Accordingly, private consumer spending will fall by 1.0 per cent in real terms on average in 2023. It will recover somewhat in 2024, but will only increase moderately by 0.6 per cent.

Inflation and public finances

For 2023, the IMK expects an average inflation rate of 5.9 per cent. Inflation will then calm down more in 2024. Although the higher CO2 price, the expiry of the energy price brakes and the normalisation of the VAT rate in the catering sector will once again have a price-driving effect at the beginning of the year, the decline in the inflation rate will at least be slowed down. From March onwards, however, the downward trend will continue, with an average inflation rate of 2.5 per cent in 2024.

Tax revenues will be subdued in 2023, not least as a result of various tax relief measures. At the same time, the state is still deploying considerable resources to combat the crisis. This will help to stabilise the economy and prevent a more severe slump. The public budget will have a deficit of 1.6 per cent in 2023 - significantly less than expected in the summer. For 2024, the IMK assumes a more restrictive course for public finances. This will slow down the economy, with the deficit forecast to fall to an annual average of 1.0 per cent in 2024.

Source: Hans Böckler Foundation