The German economy is expected to grow by 0.6% in 2024 and 1.2% in 2025, after a slight slowdown in 2023. This is based on forecasts from the Organization for Economic Cooperation and Development (OECD) published on Wednesday.
OECD forecasts show they are less optimistic than the German government which expects growth of 1.3% and 1.5% in 2024 and 2025, respectively.
A constitutional court ruling nearly two weeks ago has blocked government plans to divert unused pandemic funds to green initiatives and industry support, raising fears that Europe's largest economy could slow.
"It is important to resolve this financial budget crisis as soon as possible to bring certainty and confidence to the corporate and household sectors in the future," OECD economist Isabell Koske told Reuters.
He said the solution should include a reduction in spending, an increase in income, while at the same time including debt reform, which sets limits on new loans. The uncertainty created by the court's decision about funding policies to support firms and workers during the green sector transition could put pressure on investment and private consumption, the OECD warned.
"If more fiscal tightening is required to maintain the off-budget fund spending plan, GDP growth and inflation will be lower," the OECD said.
The German economy is expected to shrink by 0.1% this year, as high interest rates put pressure on global demand for investment goods, which make up the bulk of Germany's exports, the OECD said.
The government expects the economy to shrink by 0.4% in 2023. "The German economy is going through a difficult phase," Koske said. At the same time, the OECD also emphasized that in the next two years, declining inflation and rising wages will support real incomes and personal consumption, the OECD said.
Tighter monetary conditions, reduced energy price pressures, and fiscal tightening will help lower inflation from 6.2% in 2023 to 2.7% in 2024 and 2.1% in 2025, based on the forecast.
