Structural changes needed in Germany if economy is to recover, says Ifo

The Germany economy has been "treading water" for the past five years, according to the research firm the Ifo Institute, which predicted a contraction in GDP in 2024, followed by minimal growth over the next two years.

German GDP is expected to shrink by 0.1% this year, with the export-oriented economy struggling with weak demand, while elevated interest rates and higher inflation have led to a loss of purchasing power domestically, the Ifo said.

"While economies around the world are gradually recovering and demand is picking up, the export-oriented German industry is benefiting little from that. On the contrary, German goods exports are becoming increasingly decoupled from global economic development," the research institute said.

The Ifo said that it is not yet clear whether this period of weakness is simply of a cyclical nature (ie temporary) or whether more structural changes are needed to revamp the make-up of the economy.

In its baseline scenario, the Ifo said there are likely to be no radical changes in production potential in the coming years, and industrial companies will increasingly shift production – and subsequently their investments – overseas.

"In this scenario, a creeping deindustrialisation emerges, in the course of which the manufacturing sector’s share of total gross value added will decline permanently," it said.

Looking ahead, the Ifo said GDP would rebound by just 0.4% in 2025 with growth picking up slightly to 0.8% in 2026.

"At the moment, it is not yet clear whether the current phase of stagnation is a temporary weakness or one that is permanent and hence a painful change in the economy," said Timo Wollmershäuser, deputy director of the Ifo Center for Macroeconomics and Surveys.