Economic Prospects: Could a Turnaround Be Just Around the Corner for Germany?
Economic outlook and consumer spending: Is Germany's economic decline easing up? - Germany's downward trend has ended.
Take a peek at the economic landscape of Germany, a nation facing a tough year due to hefty energy costs and the trade conflict with US President Donald Trump. But there's a silver lining — the Organization for Economic Co-operation and Development (OECD) has good news on the horizon.
The OECD's latest economic outlook suggests that despite lingering trade strife, consumer spending is on the rise, providing a much-needed boost to the economy. Yet, the fading trade conflicts are stopping businesses from investing wholeheartedly.
Is a revival around the bend for the German economy?
The OECD has kept its dour projection of 0.4% growth, placing Germany among the worst performers among the 54 economies it surveyed. Notably, both the EU Commission and the German "Wise Men" have recently revised their predictions downwards, anticipating a stagnant economy this year.
On the brighter side, the OECD expects 1.2% growth for next year, as compared to 1.1% previously, thanks in part to planned multi-billion-euro investments by the federal government. This revised outlook is shared by the EU Commission and the "Wise Men."
"The fiscal measures of the new federal government are providing a perceptible expansionary impulse," Timo Wollmershäuser, head of economic research and forecasting at the Ifo Institute, commented. Combined with the plans outlined in the coalition agreement, these measures are expected to bump up real GDP by 0.7% this and the following year.
Geraldine Dany-Knedlik, head of DIW's macroeconomic research department, argued that the OECD's forecast underestimates the impact of these investments in the following year. "Given that some project plans are already in the works in various municipalities, this assessment seems somewhat conservative," she asserted.
Consumers themselves are playing a crucial role, as their consumer sentiment improves after years of inflation. For years, Germany has struggled with inadequate consumption due to inflation resulting from the Ukraine war. Despite normalizing inflation and rising wages, consumption has not picked up lately, but the OECD expects a change in the near future.
However, the boost in private consumption may come with a snag: if inflation rears its head again, it could pose a difficulty for consumers, who may face a downturn in purchasing power. With the labor market shortage and the growing need, attracting skilled overseas workers should be addressed urgently, the OECD experts recommend.
The export-heavy German economy remains exposed to the escalations in the trade dispute, and the OECD figures should be viewed with caution. Around 10% of German exports head to the United States. The outcome of the trade negotiations will significantly impact the projected growth, which could either deteriorate or improve depending on these negotiations.
Better days ahead?
According to Michael Grömling of the Institute of the German Economy (IW), better prospects for the coming year are contingent on a significant resolution of trade conflicts in 2023 and the situation normalizing. "Given the unpredictable nature of U.S. President Donald Trump's policies, this is a big assumption," he noted.
Even the planned investments by the federal government might not be enough to address the issue alone. "Whether public investments will trigger private investments as well or if businesses will continue to hesitate remains to be seen," Grömling added.
- OECD
- Business cycle
- Consumer confidence
- Savings
- Inflation
- Downward spiral
- US President
- Donald Trump
- Trade dispute
- Paris
- Federal government
- EU Commission
- Germany
- Crisis
- Recession
- Austria
- Norway
- Head
- Alvaro Pereira
- Institute for Macroeconomics and Business Cycle Research
- The OECD's revised growth projection for Germany in 2023, at 1.2%, suggests that the economic turnaround might be closer than expected, with the planned multi-billion-euro investments by the federal government playing a significant role.
- Despite the OECD's cautious forecast, the German economy could still see better days ahead if trade conflicts are resolved, consumer confidence improves, and inflation remains under control, thus enhancing private consumption and business investments.
