The German economy is slowly regaining its footing after a roughly two-year period of weakness. The services sector has already seen the beginning of an upturn, which will probably intensify sooner rather than later as private consumption gradually picks up again. Starting from the second half of the year, industry is also likely to expand once export business improves again. The economic recovery will be driven by consumption and exports as of 2025 as well. Households are benefiting from strong wage growth, a gradual decline in inflation and the stable labour market. Rising foreign demand is bolstering the export industry. Private investment continues to decline initially, providing perceptible growth stimulus only as of 2026. The German economy therefore grows again somewhat in the current year before expanding more strongly in the years after that. Calendar-adjusted real GDP increases by 0.3 % in 2024, 1.1 % in 2025 and 1.4 % in 2026. This is broadly in line with the last Forecast for Germany, published in December 2023.

Although the inflation rate in Germany continues to recede, it remains persistently high. As measured by the Harmonised Index of Consumer Prices (HICP), it looks set to fall from last year's 6.0 % to 2.8 % this year. Energy and food price inflation in particular is easing considerably. Core inflation (the rate excluding energy and food) is likewise declining markedly, but the disinflation process is much slower here. The core rate is likely to reach 3.1 % in 2024 before decreasing only relatively hesitantly to 2.5 % in 2025 and 2.3 % in 2026. This is mainly due to the strongly rising labour costs. These will also spark another fairly robust surge in food prices, especially next year. Energy price inflation will then also pick up again. The headline HICP rate will drop to 2.7 % in 2025 and 2.2 % in 2026. The inflation outlook for 2024 and 2025 has been revised upwards slightly compared to the December 2023 Forecast for Germany. It remains unchanged for 2026. The revisions are mainly due to stronger services inflation, higher oil prices and somewhat sharper rises in food prices. 

The government deficit ratio decreases from 2.5 % in 2023 to 1.1 % in 2026. Until 2025, this will be due to the expiry of fiscal crisis assistance measures. The expiry of these measures will outweigh sharply rising expenditure in areas such as pensions, defence and staff. Beyond 2025, relief will stem chiefly from somewhat more restrained central government spending (including special funds) and a more favourable economic situation. The debt ratio falls and stands at just a little more than 60 % in 2026.

There are various risks to the economic outlook, such as those stemming from geopolitical conflicts. Risks to inflation are currently tilted to the upside. Economic growth could pick up more quickly in the short term, but downside risks predominate over the medium term. 

The German economy contracted somewhat over the last winter half-year (October 2023-March 2024). Seasonally adjusted real GDP declined by 0.5 % in the fourth quarter of 2023, before rising again by 0.2 % in the first quarter of 2024. 1 In the short term, then, aggregate economic activity was somewhat weaker than expected in the Bundesbank’s December 2023 Forecast for Germany. 2 The sluggish demand in industry, in particular, proved to be more persistent. Against this backdrop, and in the face of heightened economic policy uncertainty combined with heavy cost burdens, firms throttled their domestic investment more sharply than anticipated. Households have not yet scaled up their consumption either, even though their real income has already improved markedly. Nonetheless, service providers’ activity has already rebounded significantly, even without impetus from consumption. The weakness in industry would have been more pronounced still had the energy-intensive sectors not upped their output again noticeably in the first quarter for the first time since the start of the energy crisis. In addition, the construction sector proved more robust than expected. This was due not only to the unusually mild weather conditions, but also to a more stable underlying trend in the non-residential sectors. 

The recovery is likely to continue and become broader in this quarter and the next. 3 GDP growth in the second quarter will probably be much the same as it was in the first quarter. However, this masks a slightly stronger underlying economic trend, as housing construction is expected to suffer a setback after the supportive effect of favourable weather conditions in the previous quarter. At first, this stronger trend will mainly be driven by service providers. Their recovery is likely to continue, and should gain breadth and strength once private consumption starts providing stimulus again. ifo indicators for the business situation and business expectations suggest that this will be the case. Compared with the first quarter, these indicators improved significantly on average in April and May for service providers as a whole, but also in the retail sector and other consumer-related services sectors in particular. Business investment, on the other hand, will probably continue to decline at first. For this reason, and given that the level of new orders remains weak, industry is not expected to stage a major recovery in the short term. But at least production in energy-intensive sectors is likely to continue its upturn, and the automotive industry could already be providing a limited amount of growth stimulus. 4 Economic activity looks set to shift up another gear in the third quarter. Consumer activity will then probably continue to solidify and industry, in particular, should provide stronger impulses. Significantly brighter ifo business and export expectations in the manufacturing sector for the next six and three months, respectively, suggest that this could be the case. This is probably because global trade is expected to pick up gradually, which would benefit the export industry in particular. 

Growth continues at this faster pace in 2025 and gains some additional momentum in 2026. It will continue to be driven by private consumption and exports, to begin with. Up until 2026, households will benefit from strong wage growth, falling inflation and a robust labour market. This will send their real disposable income sharply higher over the projection horizon. The saving ratio will also give consumption an additional boost as it returns to normal from its currently elevated level. Exports rise further on the back of growing sales markets but probably do not quite match their rate of growth. Private investment will no longer curb activity in 2025, but even so, it will not provide any noticeable stimulus until 2026, when the pace of aggregate economic growth will therefore increase again somewhat.

The German economy therefore gradually extricates itself from the bout of economic weakness it has experienced over the past two years. Germany’s real GDP, which has not grown on balance since the start of Russia’s war of aggression against Ukraine, will increase by a calendar-adjusted 0.3 % this year. In 2025 and 2026, German economic output will then expand more sharply, at rates of 1.1 % and 1.4 %, respectively. 5 The German economy will thus reach its potential output again in 2026, meaning that the output gap will then close. 6 The new figures broadly confirm the economic outlook presented in the December 2023 Forecast for Germany. The GDP rate for 2024 will be slightly weaker because its starting value at the end of the previous year was lower. GDP growth has been revised downwards a little for 2025 and upwards a little for 2026, as somewhat weaker growth in government consumption contrasts with somewhat stronger growth in private investment, the latter stemming from somewhat lower interest rate assumptions. In addition, part of the recovery in private consumption will be postponed. 

Private consumption recovers strongly over the projection horizon, making it a mainstay of the economic recovery. Households’ consumption behaviour has been shaped mainly by precautionary motives of late, which should be viewed against the backdrop of the long economic downturn, the sharply higher consumer prices and the corresponding losses in real income, as well as the uncertain economic conditions and outlook. In addition, the higher interest rates created incentives to save that were absent during the long period when interest rates were low. By contrast, real wages, which were already rising again significantly, had less of an impact on consumption, meaning that the saving ratio rose again substantially at the beginning of the year. Now, though, the robust wage rises are broadly based and increasingly taking the form of large, permanent wage increases rather than one-off inflation compensation bonuses. Combined with a robust labour market and easing inflation, strong wage growth leads to a sharp rise in real disposable income, especially this year. This will soon recoup the real income losses observed in recent years. Over the next few years, there will be further, perceptible gains in real income. The significant rise in income will therefore become a determining factor for consumption, while precautionary motives will gradually recede into the background. The recent brightening of the GfK consumer climate supports this assumption. Private consumption is therefore likely to pick up again slightly as early as the current quarter before gaining momentum in the second half of the year. After that, it will outpace real disposable income somewhat for a time, gradually pushing the saving ratio back down towards its long-term average. 

From the second half of the year onwards, exports act as a second prop to the economy. Up to the middle of the year, though, they will probably increase slightly at most. Export-oriented industry, in particular, is suffering from weak foreign demand, with new orders from abroad in the first quarter falling significantly short of the previous quarter’s average. The second half of the year, however, is likely to see the expansion in exports pick up somewhat and then continue at roughly the same pace. The cyclical recovery in global trade underlying the projection provides important tailwinds here. In keeping with this, export expectations as surveyed by the info Institute recently brightened somewhat, and ifo business expectations in the industrial sector signal a clear upturn. Furthermore, the recovery in energy-intensive industry that set in during the first quarter is likely to continue at a moderate pace over the projection horizon, buoying export activity. 7 That said, the German export industry is currently operating in a challenging international competitive environment, meaning that external demand impulses are not necessarily providing the same degree of support for exports that they long used to. Over the past four years, growth in exports has lagged considerably behind growth in sales markets. Business surveys likewise suggest that the competitive position has deteriorated markedly of late. 8 The comparatively high domestic price and wage pressures, in particular, will intensify the headwinds facing German exporters over the projection horizon. The loss of price competitiveness that this entails is likely to mean that the German export industry loses further ground in the market over the projection horizon, causing exports to grow at a somewhat slower pace than sales markets.

Business investment does not start to expand again until 2025. The prevailing investment environment is a difficult one for enterprises. The continuing weakness in industrial foreign demand is dampening firms’ propensity to invest. In addition, the tightening of monetary policy meant that interest rates on loans to enterprises rose significantly, and net lending to firms came to a standstill from the end of 2022. Domestic investment is also being held back by other constraints: firms surveyed by the Bundesbank cited high energy and wage costs as important factors, as well as the shortage of skilled workers, uncertainty about the regulatory framework and a high tax and social security burden. 9 Against this backdrop, sentiment among capital goods producers has dimmed markedly, according to information from the ifo Institute. Business investment is therefore likely to continue its recent decline for now. Only towards the end of this year will it return to a moderate growth path as the effects of monetary policy tightening fade gradually and a renewed uptick in foreign demand stimulates domestic investment. Efforts to transition to a climate-neutral economy will provide additional stimulus. Come 2026, business investment will be a significant factor driving GDP growth again.

Housing investment is expected to decline significantly again this year, owing to weak demand, before nudging upwards again. Household demand for housing continues to be inhibited by the high price of construction, increased financing cost and real income losses seen over the past three years. New orders in housing construction have not yet recovered appreciably from the weak level they have been languishing at ever since the end of 2022. Building permits do not appear to have picked up yet either. According to the ifo Institute, housing construction firms continue to report a severe lack of orders. The current quarter will also probably see a significant drop in housing investment and this will be driven mainly by weather-related rebound effects. The unusually mild weather conditions had a bolstering effect in the first quarter. Housing investment is likely to decline somewhat further in the second half of the year, given weak demand. Looking beyond the cyclical headwinds, though, there is a fundamental demand for additional housing in Germany. One reason for this lies in the high level of immigration; although it declines over the projection horizon, immigration is still a source of slight population growth even amid demographic change. The high demand for housing is also reflected in rental price inflation, which stands well above its long-term average. In addition, with energy costs high and climate policy’s “heating transition” under way, there continues to be strong demand for renovation work to upgrade the energy efficiency of the housing stock, and this should buoy housing investment throughout the projection horizon. Lastly, as real disposable household incomes rise significantly and financing costs recede again slightly, housing investment will start growing again slowly next year and pick up a little more steam in 2026. 

Real government demand supports economic growth over the whole projection horizon. A key reason for this is the significant rise in military spending up to 2026. The procurement of military equipment, such as aircraft, will lead to significantly larger government investment. Ammunitions procurement will keep government consumption rising, as will soaring expenditure on healthcare and long-term care. 

Imports climb sharply in the period to 2026 and play a part in bringing the current account balance down slightly after its significant increase. A distinct upturn in domestic demand will cause imports to far outpace exports up to the end of the projection horizon, with exports comparatively subdued in their expansion due to pressures on competitiveness. Taken in isolation, this will exert a dampening effect on the current account. However, the current account surplus is likely to start out with another moderate increase this year, rising to 7.5 % of GDP. That increase will be helped along primarily by a marked improvement in the terms of trade, which will drive up the trade balance. Over the remainder of the projection period, the terms of trade will see only a small relative improvement, and the trade balance surplus will fall slightly overall in 2025 and 2026. The current account surplus, too, will shrink again slightly over the projection horizon, dropping to just over 7 % in 2026.

The labour market remained stable in the 2023‑24 winter half-year despite the ongoing weakness in the economy. Unemployment rose a little, but employment rose slightly as well. Employment in the temporary agency work sector – a domain that is sensitive to cyclical developments – declined significantly. This contrasted with steady employment growth in services sectors where structural factors are driving a need for more staff, one example being healthcare and long-term care. Overall, the increase in employment slightly exceeded the expectations from the December 2023 Forecast for Germany. All in all, the labour market’s response to the economic slowdown has been mild: the period of weakness spanning roughly two years brought with it a gradual increase in unemployment, moderately elevated short-time work, muted working hours and a slight decline in vacancies. The degree of tightness in the German labour market thus eased slightly, but it remained at a high level. The pronounced tightness reflects structural conditions in a German labour market characterised mainly by demographic headwinds. Accordingly, parts of the economy continue to experience a pronounced shortage of skilled workers.

Employment is likely to carry on growing moderately for now, and unemployment is expected to rise somewhat, before falling again at the end of the year. Following a long downturn, recruitment plans in trade and industry now appear to be bottoming out. After two years in which core staffing levels were largely retained even in the face of adverse economic conditions, their working hours are likely to be the first area to recover as the improvement in economic activity slowly takes hold. Meanwhile, unemployment is likely to rise slightly for a few months more. The unemployment barometer compiled by the Institute for Employment Research (IAB) remains in negative territory, indicating an increase, but the indicator has been heading towards neutral in recent months. People registered as unemployed still have a relatively low chance of being hired at present. Concerning the recruitment rate for Ukrainian refugees, though, there has been a significant improvement, albeit based on a very low level to begin with. As the economic recovery gains traction, unemployment is likely to fall again slowly towards the end of 2024. On an annual average for 2024, the unemployment rate will nevertheless end up slightly higher than in the previous year, and employment growth in 2024 will be significantly weaker than in the last two years.

As of 2025, demographic developments limit the labour supply, and labour market tightness rises considerably again. The shortage of skilled workers will become more pronounced again over the remainder of the projection horizon. This is because employment is already at a very high level and, in view of the prevailing demographic challenges, can no longer grow as strongly as it has in previous years. The labour force participation rate will then stop rising owing to the unfavourable age structure in Germany, even if the individual propensity to work carries on increasing. This can only be offset to a degree by immigration. First, integrating new immigrants into the labour market is time-consuming and does not happen straightaway. Second, this projection assumes that the current high level of immigration will gradually normalise. 10 As a result, labour force numbers will go up only slightly in 2025 and fall somewhat in 2026. Given that the economic recovery will also bring a rise in demand for labour, tightness in the labour market will re-intensify considerably. 

Employment growth comes to a standstill at the end of the projection horizon, despite falling unemployment. Employment growth weakens slightly as supply bottlenecks increase and comes to a halt in the course of 2026. Unemployment falls slightly in 2025 and 2026, but will no longer open up any substantial scope for additional employment. To begin with, working hours per employee keep on going up as people work more overtime and part-time employees raise their working hours. However, this increase is expected to taper off significantly towards the end of the projection horizon as the demographic shifts in the age structure also dampen average working hours. 11 The economic recovery would then be increasingly borne by rising labour productivity on the back of increased capacity utilisation on the part of firms and sectoral shifts in the forces of growth, amongst other factors. Industry in particular once again contributes considerably to GDP growth as exports rise. Lastly, the longer the many immigrants who have arrived over the past two years remain in Germany, the bigger the boost to productivity will be, in particular thanks to their growing professional experience, the acquisition and recognition of qualifications and language skills, and a profile that better fits the vacancies on offer.

Recently, upward pressure on wages has been considerably greater than expected. The majority of the most recent collective labour agreements exceeded the expectations presented in the December 2023 Forecast for Germany. This was reflected in a sharp rise in negotiated wages in the first quarter of 2024, but will also extend far into the coming quarters. For example, the latest collective labour agreement in the retail trade sector, which was reached after more than one year of negotiations, will result in substantial wage rises mainly in the second half of the year. 12 Wages also rose more strongly than expected across the broader economy. The forecast for both negotiated earnings and actual earnings was therefore revised significantly upwards in 2024.

Negotiated wages rise sharply this year and continue to see strong growth in subsequent years, but to a considerably lesser degree. According to the new forecast, negotiated wages will rise by 5.9 % on an annual average in 2024. Trade unions are still striving to recoup the losses in real wages from previous years that have not yet been fully offset. Their wage demands remain high and they are successfully negotiating comparatively strong results. Furthermore, the employee side is well aware that the temporary compensation of purchasing power provided by tax-free and social security contribution-exempt inflation compensation bonuses will disappear when these bonuses are phased out at the end of the year. The slight slowdown in the labour market is likely to dampen wage growth only marginally. Inflation compensation bonuses are currently still making a large contribution to growth in negotiated wages. However, their relevance is likely to diminish over the course of the year, while the significance of the permanent wage components will probably grow. By 2025, inflation compensation bonuses will have been completely phased out, which will result in negative base effects on annual rates of growth. For this reason in particular, wage growth will then slow markedly. 13 In addition, in an environment of lower inflation rates, it is also expected that new collective labour agreements will be somewhat lower than in the previous two years. 14 On balance, negotiated wages are projected to rise at a rate of 2.7 % in 2025. In 2026, the renewed tightening of the labour market and the more favourable economic situation will be reflected by an increase in negotiated wages of 3.1 %. 

Growth of actual earnings remain consistently somewhat above growth of negotiated wages over the projection horizon. This year, actual earnings will grow by 6 %, and thus roughly as strongly as in 2023. They will thus only slightly exceed negotiated wages. One reason for this slightly positive gap – known as “wage drift” – is the established practice of paying out performance bonuses, which were marginally higher this year than in the previous year. 15  Wage drift will increase in 2025, mainly due to rising working hours, and will remain markedly positive in 2026, too, particularly as a result of increasing labour market shortages. On balance, actual earnings rise by 3.2 % in 2025 and 3.5 % in 2026. These rates are considerably higher than the historical average since German reunification. Compensation per employee will even rise slightly more strongly, especially in 2025, as there will be a marked increase in employers’ social contributions. 16

High profit margins normalise. Unit labour costs will continue to exert very significant pressure, as the economy is set to grow only slightly this year, with robust employment but very high wage growth. However, enterprises are likely to mitigate this to some degree by reducing profits. This is because, compared with previous years, when they were able to expand their profit margins sharply, supply bottlenecks have now been resolved and demand has weakened significantly – in part, due to tighter monetary policy. According to ifo Institute surveys on production constraints, insufficient demand now outweighs supply-side factors in many sectors. Aggregate profit margins will therefore fall steeply in 2024 and return roughly to their pre-pandemic levels. As a result, substantial domestic inflation will recede significantly despite sharply rising unit labour costs. From 2025 onwards, in addition to more moderate wage growth, the recovery in labour productivity will contribute to the high level of unit labour costs diminishing markedly. Against this backdrop, domestic inflation as measured by the GDP deflator will fall noticeably, from 6.6 % last year to 3.7 % this year and then 2.2 % in 2026.

The disinflation process continues, but core inflation is more persistent than anticipated. Consumer price inflation, as measured by the HICP, continued to decline during the past winter half-year. According to the flash estimate, the rate stood at 2.8 % in May, which was marginally lower than expected in the Forecast for Germany last December. This was attributable mainly to a larger decrease in energy prices. However, contrary to expectations in the December 2023 forecast, the rate excluding energy and food (i.e. the core rate) did not decline any further between November and May. This was attributable to services, for which prices mostly grew to a greater degree than expected. The same is true for rents. Most recently, rents rose by 2.2 %. This is almost twice as much as the average rent increase since 1999. By contrast, price pressures for non-energy industrial goods decreased somewhat faster than projected.

On average this year, the rate of inflation is likely to more than halve, with the core rate declining more slowly. Particularly due to the high cost pressure from wages, it is also unlikely that the strong price inflation for services will abate significantly over the remainder of the year. Non-energy industrial goods inflation, meanwhile, should decline more sharply. This is attributable to a number of factors: first, wages comprise a smaller proportion of costs for these goods than for services. 17 Second, and more significantly, these goods had experienced a stronger surge in prices caused by supply-side disruptions resulting from the coronavirus pandemic and the war in Ukraine, which is now rapidly subsiding. Lastly, price setting for industrial goods is much more flexible. 18 The core rate overall will thus fall from 5.1 % last year to 3.1 % on an annual average in 2024. Disinflation will be even greater for food products; price inflation for these products, which was still in double-digits last year, will abate broadly to its pre-crisis level of just over 2 %. This is due to both falling agricultural producer prices as well as lower wholesale electricity prices and lower natural gas prices. Furthermore, the latter will mean that energy inflation, which had already fallen sharply last year, will continue to decline somewhat this year. 19 An even greater drop in energy inflation is being prevented by a rise in the carbon price on fossil fuels as well as the normalisation of the VAT rate on gas and district heating following its temporary reduction. 20 The headline HICP rate is thus likely to decline to 2.8 % on an annual average this year, more than halving compared to 2023. 

Over the remainder of projection period, inflation now declines only slowly in light of the high wage pressures. The core rate is expected to continue to decline, first to 2.5 % in 2025 and then to 2.3 % in 2026. This is because monetary policy tightening still has an impact and the sharp rise in unit labour costs diminishes. However, the rise in wages, which remains comparatively strong, will lead to above-average increases in prices, especially for services. For energy, price inflation will go up again noticeably in 2025. Gas prices are assumed to decline. That said, the carbon price will continue to be raised, wholesale prices for electricity are assumed to rise markedly, and the temporary uptick in crude oil prices will continue to be felt to a certain degree in some cases. In 2026, falling crude oil and natural gas prices will then partially offset the further rise in the carbon price. Energy will then once again have more of a dampening effect on headline inflation. Food inflation will pick up again, especially in 2025. This is because the earlier growth in wages is driving prices, and the previous dampening effect from agricultural producer prices will disappear as these prices will not decline any further. Overall, headline HICP inflation will drop to 2.7 % in 2025 and 2.2 % in 2026.

The deficit ratio declines from 2.5 % in 2023 to 1.8 % in 2024, primarily due to the expiry of energy crisis measures (see the section on the underlying conditions for this projection). This drop would be greater were it not for the steep increase in other expenditure, such as defence spending and transfers to Ukraine. Furthermore, outlays on staff and pensions are set to rise significantly, mainly on the back of the high inflation of the past few years. Weak economic activity will burden the budget only moderately, mostly because the labour market is expected to remain robust. In particular, wages and salaries, which yield high levels of revenue, will see continued dynamic growth, with unemployment being only slightly heightened.

The deficit ratio declines to 1.6 % in 2025 and 1.1 % in 2026 because wage components are no longer exempt from tax and social security contributions and the Climate Fund scales back its spending. A number of steeply rising expenditure items will weigh on the government budget, however. Not least, spending on pensions will increase dynamically, driven by a combination of strong aggregate wage growth and increased retirement numbers. In addition, funding costs for government debt will rise, pushing up interest expenditure substantially. Weak economic activity will still affect the government budget in 2025. In 2026, the cyclical effect will essentially have come to an end.

The structural budgetary position deteriorates up to 2025 before improving somewhat thereafter. Disregarding the transitional influences from temporary crisis measures and economic activity (that is to say, viewed in structural terms), the deficit ratio in 2026 will be 1 %, up from ½% in 2023. This is mainly due to strongly increasing spending on pensions, defence and staff, in particular. Central government outlays will rise substantially, mainly in 2024, with much of central government's reserves in the core budget and the Climate Fund being depleted over the course of the year. This will push up central government’s structural deficit, which will then decrease again slightly next year and somewhat more strongly in 2026. In parallel to this, though, the structural budgetary position of the statutory pension insurance scheme deteriorates gradually.

The Maastricht debt ratio declines to 60.7 % by end-2026 because of strong growth in nominal GDP. At the end of 2023, the debt ratio stood at 63.6 %. The ratio-reducing impact of nominal GDP growth is expected to outweigh the debt-increasing deficits. While central government will borrow more to build up the generational capital fund, 21 there is a decline in the debt accrued in connection with coronavirus assistance loans as well as the bad bank portfolios dating back to the financial crisis. Including the share of EU debt that Germany will ultimately have to shoulder, the debt ratio is higher and likely to decline at a slower pace: expanded to account for this share, the debt ratio is expected to fall from 65 % in 2023 to just over 63 % in 2026. 22

The macroeconomic projections presented here are subject to a number of uncertainties. Overall, risks to inflation are currently tilted to the upside. There are upside risks that economic growth will pick up more quickly in the short term, but downside risks predominate over the medium term.

Geopolitical tensions continue to shape the uncertainty outlook, presenting upside risks to inflation and downside risks to economic output. In particular, Russia’s war against Ukraine and the conflict in the Middle East could intensify or spread, adversely affecting the supply of energy commodities in the global market and disrupting supply chains. This could drive up import prices for energy and other goods, directly resulting in a rise in Germany’s inflation rate as well as weighing on economic activity. An escalation of trade policy tensions or an uptick in geopolitical fragmentation could have similar ramifications.

Inflation could turn out to be stickier if wages increase more strongly, if profit margins do not decline or if rents rise more substantially. Stronger than expected wage growth could endanger the disinflation process. This could be the result of employees applying higher inflation expectations in their wage negotiations, for one thing. For another, in view of the tight labour market, employees may be able to push through even higher wage increases than assumed in this projection. In addition, profit margins could prove stickier, leaving price pressures high for longer. Both factors could produce stronger inflation, in particular for services, which are already more dynamic overall than previously expected. Services prices could gain additional traction if rents rise more steeply on the back of a limited housing supply. 23

The international competitiveness of the German economy could deteriorate more substantially than expected. In the event of geopolitical crises, the import prices of energy and other intermediate goods – and thus the relative production costs in Germany as a business location – could see a more protracted increase. Significantly stronger domestic wage growth could have a similar effect, potentially resulting in some enterprises scaling back their production operations in Germany or relocating abroad. In addition, the German industrial sector could see its competitiveness decline for other reasons, such as corporate decisions in a setting that is currently characterised in particular by uncertain future framework conditions and structural change. For example, enterprises might cling to outdated technology in spite of structural shifts in demand due to climate change. This could leave exports at risk of benefiting less from rising foreign demand than assumed in this projection, resulting in weaker GDP growth. 

That said, economic activity could improve sooner than expected, at least in the short term. Particularly in the short term, private consumption and business investment might pick up more strongly. Should consumers’ precautionary motives subside sooner than anticipated, private consumption could increase more quickly. 24 With real disposable income recovering strongly this year, consumption expenditure could grow more quickly than expected, and the saving ratio could decline faster than assumed. In this scenario, however, consumption growth would probably be less pronounced in the following years. Business sentiment, too, could improve more strongly, potentially leading to an earlier recovery in business investment. Lastly, it is also possible that exports will gain traction sooner. The past weakness in exports could turn out to be more of a predominantly cyclical phenomenon than a persistent issue with Germany’s competitiveness. As global trade recovers, exports could then also see a stronger uptick than anticipated. Taken together, these factors would result in greater capacity utilisation in the economy. Particularly in the event of a stronger upswing in domestic demand, this would leave inflation pressures higher than expected. This could slow the disinflation process and thus add a further upside risk to the inflation outlook.

Barrios, D., S. Russell and M. Andrews (2016), Bringing Home the Gold? A Review of the Economic Impact of Hosting Mega-Events, CID Working Papers No 320, Center for International Development at Harvard University.

Deutsche Bundesbank (2024a), The German economy, Monthly Report, May 2024. 

Deutsche Bundesbank (2024b), Global and European setting, Monthly Report, May 2024.

Deutsche Bundesbank (2024c), The economic impact of shipping disruptions in the Red Sea, Monthly Report, February 2024.

Deutsche Bundesbank (2024d), Domestic investment barriers faced by German enterprises, Monthly Report, May 2024.

Deutsche Bundesbank (2024e), The Maastricht debt of the EU institutions and its fiscal implications for Germany, Monthly Report, April 2024.

Deutsche Bundesbank (2023a), Falling inflation, but not yet time to sound the all-clear – outlook for the German economy up to 2026, Monthly Report, December 2023, pp. 15‑35.

Deutsche Bundesbank (2023b), The plan to introduce a generational capital fund to ease pressures on the pension scheme’s finances, Monthly Report, November 2023, pp. 79‑81.

Deutsche Bundesbank (2019a), The impact of wages on prices in Germany: evidence from selected empirical analyses, Monthly Report, September 2019, pp. 15‑37.

Deutsche Bundesbank (2019b), The impact of the Climate Package on economic growth and inflation, Monthly Report, December 2019, pp. 29‑33.

European Central Bank (2024), Eurosystem staff macroeconomic projections for the euro area, June 2024, Eurosystem staff macroeconomic projections for the euro area, June 2024 (europa.eu)

Gautier, E., C. Conflitti, L. Fadejeva, E. Gutiérrez, V. Jouvanceau, J.-O. Menz, A. Paulus, P. Roldan-Blanco and E. Wieland (2024), How price adjustment patterns change with higher inflation: recent evidence from euro area micro consumer price data, in L. Dedola, L. Henkel, C. Höynck, C. Osbat and S. Santoro, What does new micro price evidence tell us about inflation dynamics and monetary policy transmission?, ECB Economic Bulletin, Issue 3/2024.

German Chamber of Commerce and Industry (2023), DIHK-Netzwerk-Industrie-Umfrage 2023: Industriestandort Deutschland: Strukturschwächen beseitigen

info Institute (2024), German manufacturing sees threat to its competitiveness.