By Ed Frankl
Germany’s central bank lowered its growth forecasts for the country’s economy for the next two years due to lower global demand, according to a twice-yearly report published Friday.
The Bundesbank now expects gross domestic product growth at 0.4% and 1.2% for 2024 and 2025, down from 1.2% and 1.3%, respectively, under previous forecasts made in June.
The bank penciled in for GDP to fall 0.1% in 2023 as a whole, and also predicts growth at 1.3% in 2026 in the fresh forecasts.
Weak foreign demand is the main drag on the country’s key industrial sector, while restrained private consumption and higher financing costs are dampening investment, it said.
However, the economy will benefit from a robust labor market, strong wage growth and falling inflation that should help bring about a recovery in household spending, it added.
“From the beginning of 2024, the German economy is likely to return to an expansion path and gradually pick up speed,” Bundesbank President Joachim Nagel said.
This comes as inflation is set to fall faster than previously expected. The Bundesbank sees harmonized annual inflation–based on European Union metrics–at 2.7% and 2.5% in 2024 and 2025, respectively, down from the 3.1% and 2.7% it predicted in June.
“Monetary policy tightening is increasingly yielding results,” Nagel said.
However, inflation is still set to be 2.2% in 2026, above the 2% target of the European Central Bank, which has recently raised rates at an unprecedented speed. The ECB held rates at a record high at its meeting this week.
Meanwhile, the latest turmoil related to the German government’s budget–which for 2024 was only agreed to this week–won’t significantly alter the fiscal and macroeconomic outlook, according to the Bundesbank.
However, there is still uncertainty regarding future fiscal policy, in particular for 2025 and in terms of the country’s transition to cleaner energy, it said.
Write to Ed Frankl at edward.frankl@wsj.com
