The German economy is not only struggling with persistent economic headwinds, but is also having to adapt to changing structural conditions. This is affecting the industrial sector in particular, putting a strain on its export business and investments. The labour market, too, is now responding noticeably to the protracted weakness of economic activity. This is dampening private consumption. Against this backdrop, the German economy is set to stagnate in the winter half-year 2024‑25 and only begins to make a slow recovery over the course of 2025. Exports then gradually benefit from the growing sales markets, albeit to a lesser extent than used to be the case. After some delay, business investment also goes back up on the back of rising capacity utilisation and lower financing costs. Private consumption rises consistently, but is initially noticeably slowed by a temporary weakening of the labour market and a significant decline in wage growth.

Calendar-adjusted real GDP falls again slightly in 2024, by 0.2 %, then grows by 0.2 % in 2025, 0.8 % in 2026 and 0.9 % in 2027. The growth outlook is thus revised sharply downwards relative to the June 2024 Forecast for Germany over the entire forecast horizon. This is primarily due to the more persistent weakness in the industrial sector, which is, in addition, largely considered to be structural now, and the consequently significantly gloomier outlook for exports and business investment. Private consumption is also less dynamic, no longer acting as an independent driver of the expected recovery.

In spite of subdued economic activity, the inflation rate remains elevated in 2025, falling only slightly from 2.5 % this year to 2.4 % (as measured by the HICP). This is due to the temporarily steeper rise in food prices and the only slowly abating increase in the price of services. In the years that follow, however, the inflation rate in Germany gradually returns to 2 %, because the effects of previous monetary policy tightening linger and price pressures from labour costs decrease. Compared with the June Forecast, the inflation outlook has been revised downwards somewhat, mainly due to lower energy prices and lower wage growth.

The government deficit ratio decreases slightly, from 2.6 % in 2023 to 2.4 % in 2027. Although the expiry of measures put in place to address the energy crisis is providing some relief, other expenditure, such as social security, interest and defence spending, is climbing strongly. The debt ratio falls to 61.7 % in 2027 (2023: 62.9 %).

Current uncertainty factors influencing the Forecast concern, in particular, increasing protectionism, geopolitical conflicts, the impact of structural change and the orientation of future fiscal and economic policy following the Bundestag elections. All in all, as things now stand, risks to economic growth are predominantly tilted to the downside and risks to inflation to the upside.

Table 1.1: December 2024 forecast
Item	2024	2025	2026	2027
Real GDP , calendar adjusted	- 0.2	0.2	0.8	0.9
Real GDP , unadjusted	- 0.2	0.1	1.1	1.0
Harmonised Index of Consumer Prices	2.5	2.4	2.1	1.9
Excluding energy and food	3.3	2.4	1.9	2.0
Source: Federal Statistical Office (up to Q3 2024). Annual figures for 2024 to 2027 are Bundesbank forecasts.

1 Macroeconomic outlook

1.1 The German economy is emerging only slowly from stagnation

Hopes back in the spring of a slowly strengthening recovery of the German economy were not realised. Instead of expanding markedly, real GDP

declined somewhat in the summer half-year in seasonally adjusted terms.

Seasonal adjustment here and in the remainder of this text also includes adjustment for calendar variations, provided they can be verified and quantified. In June’s Forecast for Germany, cumulative

GDP

growth of 0.5 % was expected for the second and third quarters of 2024 (see Deutsche Bundesbank (2024a)). In actual fact,

GDP

contracted by 0.3 % in the second quarter and rose by only 0.1 % in the third quarter.

Despite growing sales markets, exports contracted sharply. The impact of the German economy’s reduced competitiveness was thus more strongly felt than expected. Against this backdrop, compounded by declining output and a very low level of capacity utilisation in the industrial sector, firms dialled back their investment more substantially than anticipated. Housing investment also fell more sharply than predicted. Private consumption growth ultimately fell significantly short of expectations as well. Persistently weak economic activity, coupled with a more unfavourable development of the labour market, likely contributed to this.

It is becoming increasingly apparent that the German economy is struggling not only with persistent economic headwinds, but also with considerable structural problems. It is under great pressure to adapt due to changing structural conditions both at home and abroad. This is mainly a problem for the export-oriented industrial sector. Domestically producing industrial firms must adjust, in particular, to the longer-term effects of the energy price shock triggered by Russia’s war of aggression against Ukraine,

See Deutsche Bundesbank (2022a).

the requirements of the green transition to a carbon-neutral economy

This applies in particular to the motor vehicle industry; for more information, see Deutsche Bundesbank (2024b), Recent developments in Germany’s automotive industry, supplementary information in The German economy.

and the consequences of demographic change.

See Deutsche Bundesbank (2017).

Demanding regulatory requirements for enterprises

According to

ifo

Institute

(

CESifo

2024), strict regulation and excessive bureaucracy are the main factors dampening investment by German enterprises.

and uncertainty surrounding the economic policy conditions are also burdens here.

See Deutsche Bundesbank (2024c).

In addition, German firms are being confronted with increasing protectionist tendencies and growing competition from emerging markets. China, in particular, has gained considerable ground in the automotive and chemical industries and mechanical engineering – sectors which are particularly integral to German industry – as well as distinct market shares.

See Deutsche Bundesbank (2024b).

In the fourth quarter of 2024 and the first quarter of 2025, too, the German economy is unlikely to emerge from its stagnation.

The Bundesbank finalised this Forecast for Germany on 27 November 2024. It was incorporated into the projections for the euro area published by the European Central Bank

(

ECB

)

on 12 December 2024.

The improved sentiment among firms back in the spring has deteriorated markedly again in recent months. Particularly in the industrial sector, business conditions deteriorated, according to

ifo

Institute, and firms are more pessimistic about their short-term prospects. Industrial output and exports are therefore likely to decline somewhat further. Business investment will also probably continue to decrease. The construction sector could slowly stabilise at a low level, but housing investment, in particular, will probably be weaker again at first. Although service providers are likely to provide some support in the short term, their business, too, weakened somewhat, according to surveys conducted by

Global and

ifo

Institute. Private consumption could at least provide limited impetus. Overall, however, economic output is likely to stagnate in the current winter half-year. Economic data for October, which were published after the Forecast was finalised, support this assessment and indicate a weak start to the fourth quarter. For instance, production in the industrial and construction sectors was, respectively, noticeably and slightly below third-quarter levels, and real retail sales did not quite manage to maintain their

level either.

The German economy will only slowly emerge from stagnation over the remainder of 2025. In particular, continuously rising and solidifying foreign demand suggests that the German economy will slowly return to a moderate expansion path over the course of next year.

See the supplementary information entitled

Underlying conditions for the Forecast for Germany

The German export industry gradually begins to benefit from the increase in foreign demand, albeit to a lesser extent than was once the case due to strong competitive pressure. Exports thus gradually regain their footing. Private investment, by contrast, continues to decline for the time being. Private consumption will initially grow only weakly: contrary to expectations in previous forecasts, it is no longer a strong, independent driver of the recovery. This is mainly due to the fact that real disposable income is significantly weaker in view of a gloomier labour market outlook and lower wage growth.

In 2026 and 2027, the pace of macroeconomic expansion stabilises somewhat. Exports generate moderate growth impulses. Business investment returns to an expansion path, bolstered by rising capacity utilisation and more favourable financing conditions. The latter, coupled with increasing real disposable income, also benefits private housing investment, which then embarks on a subdued recovery path too. Households see their purchasing power increase markedly again and increase their consumption somewhat more strongly. Taken together, government investment and consumption expenditure have a supportive effect throughout the forecast period.

Table 1.2: Technical components of the	GDP	growth forecast
Item	2024	2025	2026	2027
Statistical carry-over at the end of the previous year¹	- 0.2	0.0	0.2	0.4
Fourth-quarter rate²	0.0	0.4	1.0	1.0
Average annual GDP growth rate, calendar adjusted	- 0.2	0.2	0.8	0.9
Calendar effect³	0.0	- 0.1	0.3	0.1
Average annual GDP growth rate⁴	- 0.2	0.1	1.1	1.0
Source: Federal Statistical Office (up to Q3 2024). Annual figures for 2024 to 2027 are Bundesbank forecasts. 1 Seasonally and calendar-adjusted index level in the fourth quarter of the previous year in relation to the calendar-adjusted quarterly average of the previous year. 2 Annual rate of change in the fourth quarter, seasonally and calendar adjusted. 3 As a percentage of GDP . 4 Discrepancies in the totals are due to rounding.

Under these conditions, the German economy grows only marginally next year, but somewhat more significantly in 2026 and 2027. Calendar-adjusted real GDP

falls again slightly this year, by 0.2 %, then grows by 0.2 % in 2025, by 0.8 % in 2026 and by 0.9 % in 2027. The growth outlook is thus revised significantly downwards over the entire forecast period compared with the June Forecast – for 2025 most of all. This is primarily due to the more persistent weakness in the industrial sector, which is not only accompanied by a more persistent weakness in cyclical demand but is

to a large extent considered to be structural now, too. The outlook for exports and industrial investment is thus considerably gloomier. The forecast for the increase in private consumption has also been revised sharply downwards. This reflects the significantly weaker labour market outlook, first and foremost.

Table 1.3a Revisions since the June 2024 forecast
Item	2023	2024	2025	2026
GDP (real, calendar adjusted)
December 2024 forecast	- 0.1	- 0.2	0.2	0.8
June 2024 forecast	0.0	0.3	1.1	1.4
Difference (in percentage points)	- 0.1	- 0.5	- 0.9	- 0.6

As the outlook is weaker, also due to structural factors, the expected potential output growth of the German economy has been revised considerably downwards. Structural burden factors play a significant role in the subdued growth outlook, resulting in persistently weak estimates for potential output growth throughout the forecast horizon. The estimated potential rates between 2024 and 2027 stand at a mere 0.4 % per year.

By comparison, it is estimated that potential growth averaged 1.4 % per year in the period from 2011 to 2019.

The contributions to growth made by capital and total factor productivity

(

TFP

)

are lower than in the June projection, meaning that the recovery expected at that point in time will not materialise.

The rates for 2025 and 2026 were revised downwards by 0.1 and 0.2 percentage point respectively.

Beyond the forecast horizon, too, growth opportunities for the German economy appear very subdued from today’s perspective, and as long as supply-side measures remain unforeseeable in concrete terms, a revival of potential growth seems unlikely.

The level of potential output in recent years is now also estimated to be significantly lower. In particular, the weak industrial activity that was already clearly discernible before the pandemic, and the slowdown in productivity growth following the financial crisis of 2008‑09, are indicative of major structural burdens stemming from factors that have been at play for some time. These include demographic change, the tendency towards declining efficiency gains from the digital transformation,

See Deutsche Bundesbank (2023a).

increasing protectionism, and also the trend slowdown in global trade that has been observed since the financial and economic crisis.

See Deutsche Bundesbank (2023b).

From today’s perspective, these dampening structural forces are deemed to be stronger, and consequently, there was a distinct downward revision to growth in potential output retroactively for the years 2014 to 2019.

This is reflected in lower than previously estimated contributions from trend

TFP

and capital input. By contrast, the estimate of potential growth in the period from 2020 to 2024 was already conservative and was revised only marginally in this Forecast.

At the same time, this means that the favourable development of economic activity in the years prior to the pandemic is classified as more cyclically induced.

Potential output and revision of potential output

The negative output gap will largely be closed by 2027. As a result of the revised estimate of potential output, the estimated output gap is smaller at the current end, thus also reducing the potential for catching up over the forecast period. However, the output gap is still negative at present. Now, the fact that aggregate demand is too weak is also likely to be a key factor in this again.

Over the past few years, though, temporary supply constraints also played a role; see, for example, the box in Deutsche Bundesbank (2023c), pp. 15 f.

This is indicated by the

ifo

Institute’s survey data on production constraints, which largely show a shortage of orders or demand to be the biggest constraint on production. Given the expected recovery in economic activity, the output gap is largely closed by the end of the projection horizon in 2027.

Supply-side and demand-side production constraints

Supplementary information

Underlying conditions for the Forecast for Germany

The Forecast for Germany is based on joint assumptions by Eurosystem experts about the global economy, exchange rates, commodity prices and interest rates. These assumptions are based on information that was available on 20 November 2024. The forecast incorporates fiscal policy measures as soon as they are sufficiently specified and their implementation is considered likely.

External environment

The global economy will grow moderately over the forecast horizon.

All data on global economic growth and global trade refer to global aggregates excluding the euro area.

Developments in global economic activity in the past summer half-year were largely in line with the assumptions made in the June Forecast for Germany. Domestic demand in the United States was somewhat more dynamic than expected. Alongside economic policy stimuli in China and the United Kingdom, this momentum boosts the global economic growth expected for next year. At the same time, the global outlook is dampened by a slower than expected growth in central and eastern European countries in June. After growing 3.4 % this year, the global economy is expected to grow by 3.5 % next year. In 2026 and 2027, it weakens again slightly to rates of 3.3 % and 3.2 %. For the United States, the incoming

administration’s proposed extension to the tax cuts for households and enterprises under the “Tax Cuts and Jobs Act”, set to expire at the end of 2025, will be taken into account. Other measures that are on the table, such as trade or immigration policy, have not been taken into account due to uncertainty regarding their implementation and design.

Some of them pose a significant risk to global economic developments, especially world trade. See also the supplementary information on the possible impact on the German economy of measures announced by the incoming

administration.

The economic recovery process in the other euro area countries continues. Economic development figures in the other euro area countries on which the forecast is based are derived from the forecasts of the national central banks, which were incorporated into the projection for the euro area published by the ECB

on 12 December 2024.

See European Central Bank (2024).

For the euro area excluding Germany, economic growth is therefore expected to increase from a rate of 1.1 % this year to 1.5 % and 1.7 % in 2025 and 2026, respectively. This means that the dynamics will only be slightly lower next year than in the June Forecast and will otherwise remain broadly unchanged. The growth rate is expected to decline slightly to 1.5 % in 2027.

While global trade is losing momentum, German sales market growth is regaining lost ground – in 2026 and 2027, both expand in line with global economic growth. International trade increased more strongly in the 2024 summer half-year than expected in the June Forecast. Imports by the United States, the United Kingdom and some emerging market economies, in particular, grew sharply. The momentum in global trade is expected to weaken over the forecast horizon. Following an increase of 4.0 % on average for the current year and of 3.6 % next year, growth rates of 3.3 % and 3.2 % are expected for 2026 and 2027, which would be on a par with global economic growth. German exporters’ sales markets are developing more slowly than global trade this year owing to falling imports by Germany’s euro area trading partners. Next year, the dynamics of sales markets will then largely move closer to those of global trade. For 2026 and 2027, growth is expected to be in line with global trade dynamics.

Table 1.4: Major assumptions of the projection
Item	2024	2025	2026	2027
Exchange rates of the euro
US dollar/euro	1.08	1.06	1.06	1.06
Effective¹	124.2	123.5	123.5	123.5
Interest rates
Three-month EURIBOR	3.6	2.1	2.0	2.2
Yield on government bonds outstanding²	2.4	2.4	2.5	2.6
Prices
Crude oil³	81.8	71.8	70.1	69.2
Natural gas⁴	34.3	42.9	34.9	29.3
Electricity^{4, 5}	76.7	89.9	79.5	73.6
Other commodities^{6, 7}	8.9	5.8	- 0.4	- 1.7
Food^{7, 8}	- 1.2	5.0	2.1	1.4
German exporters’ sales markets^{7, 9}	1.6	3.1	3.3	3.2
1 Compared with 42 currencies of major trading partners of the euro area (EER -42 group of currencies); Q1 1999 = 100. 2 Yield on German government bonds outstanding with a residual maturity of over nine and up to ten years. 3 US dollars per barrel of Brent crude oil. 4 Euro per MWh . 5 Wholesale prices in the euro area based on data from the European Central Bank. 6 In US dollars. 7 Year-on-year percentage change. 8 Producer prices for food in the euro area based on data from the European Commission. In euro. 9 Calendar adjusted.

Commodity prices

Prices for energy commodities tend to decline over the forecast horizon. Concerns about demand have caused crude oil prices to decline since the summer, outweighing price-supporting factors such as the ongoing OPEC

cuts and tensions in the Middle East. Forward quotations indicate a further decline in prices over the next three years. They are also below those given in the June Forecast. By contrast, natural gas prices in the European wholesale sector have risen significantly since the summer. Their forward quotations have also picked up and are above the June assumptions. Developments in connection with the war between Russia and Ukraine may have played a role in this. In addition, European gas storage levels began to decline somewhat earlier than in previous years in view of an early cold spell. Higher demand for filling gas storage facilities is therefore expected in the coming summer season. Forward quotations suggest that European gas prices will nevertheless decline again after the winter of 2024‑25. European electricity prices are also expected to decline on an annual average from 2025 onwards, with seasonal price increases in the forward quotations throughout the year anticipated during the winter months of each year.

Other commodity prices continue to rise initially, but decline somewhat after next year, with the exception of agricultural producer prices. Following a decline in the summer, other commodity prices have increased again somewhat in recent months. The rise in food commodity prices is also likely to have been abetted by crop failures caused by record-high global temperatures in the summers of 2023 and 2024.

See

Deutsche Bundesbank

(2024g).

For total non-energy commodity prices, forward quotations indicate a further rise next year before decreasing slightly in 2026 and 2027. Euro area agricultural producer prices continue to fall slightly on average this year. Growth is expected over the next three years, however, meaning that their level will be increasingly above that of the June Forecast.

Interest rates and exchange rates

Interest rate assumptions initially decline slightly before rising somewhat again. The Governing Council of the ECB

lowered key interest rates by 25 basis points at its monetary policy meetings in June, September and October 2024. On the cut-off date,

EURIBOR

forward prices were tilted to the downside up to 2026 before pointing slightly upwards again for 2027. They are thus below those of the June Forecast for the next two years. For ten-year federal bonds (Bunds), forward prices for the coming year show a broadly constant yield, which then rise slightly above the June Forecast assumptions from 2026 onwards. Financing costs for bank loans are also expected to decline slightly at first but then rise somewhat again, although they are likely to be lower than in the June Forecast.

The euro has depreciated since June 2024. Expectations regarding US

monetary policy and the outcome of the presidential elections in the United States weighed on the euro.

In the period that is relevant to the derivation of the exchange rate assumptions, it traded at

$1.06, 1.9 % lower than the assumptions made in the June Forecast. At 0.6 %, the euro’s depreciation in relation to 41 currencies important for German foreign trade was lower due to gains against some central European currencies.

Fiscal policy

There is no federal budget for 2025, and the forecast assumes that the rules for interim management of the budget will apply for the time being. Central government spending thus flows steadily even without new budget plans; a more restrictive policy is not necessary.

See

Deutsche Bundesbank

(2024b)

The only planned but not yet adopted legislative change that has been taken into account is compensation for bracket creep in income tax. This is well-established and therefore assumed in all forecast years (as in previous Bundesbank Forecasts for Germany).

Temporary crisis measures will weigh on the government budget for the last time in 2024. Seen in isolation, the lapsing of these measures means that the deficit ratio will fall by just over 1 percentage point this year and by ½ percentage point next year. This year, the sizeable spending on energy price brakes in particular will come to an end. The revenue shortfalls resulting from inflation compensation bonuses, which are exempt from taxes, will occur for the last time in 2024. In addition, the reduced VAT

rate on gas and heat was still in effect in the first quarter of 2024.

The overall contribution rate to the statutory social security schemes is assumed to rise to a record level over the forecast horizon. This is mainly due to the contribution rates to the statutory health insurance and long-term care insurance schemes. For 2025, the Federal Government is raising the supplementary contribution rates for health insurance institutions sharply and the contribution rate of the long-term care insurance scheme markedly. According to this forecast, the contribution rates to the statutory health insurance and long-term care insurance schemes will continue to increase significantly in subsequent years as well. The contribution rate for the statutory pension insurance scheme is assumed to rise somewhat in 2027. Rising contribution rates close funding gaps, which are mainly caused by sharply rising expenditure on benefits.

See

Deutsche Bundesbank

(2024b)

The forecast assumes that bracket creep will continue to be offset retrospectively by corresponding adjustments to the tax rate. Revenue shortfalls also arise because income tax allowances for 2024 are raised again retroactively. In addition, the electricity tax for enterprises in the manufacturing sector will be lowered up to the end of 2025. By contrast, revenue from profit-related taxes will increase more strongly, especially from 2025 onwards, as a result of measures taken. The extended tax depreciation options in recent years have been used to accelerate depreciation, which is why depreciation is now correspondingly lower – and tax revenue thus higher.

In further measures, additional revenue and expenditure are partly intertwined. Revenue from carbon emission allowances also rises gradually over the forecast horizon, financing expenditure by the Climate Fund. The extended HGV

toll generates additional revenue this year, much of which flows into the modernisation of the rail network. By contrast, lower revenue will occur in 2027 because the

s Next Generation

programme comes to an end. Given the central government’s tighter financial situation, the forecast now assumes that it will then phase out some of the associated expenditure.

Footnotes

All data on global economic growth and global trade refer to global aggregates excluding the euro area.
Some of them pose a significant risk to global economic developments, especially world trade. See also the supplementary information on the possible impact on the German economy of measures announced by the incoming US
administration.
See European Central Bank (2024).
See Deutsche Bundesbank (2024g).
See Deutsche Bundesbank (2024b).
See Deutsche Bundesbank (2024b).

Supplementary information

Details on the forecast of expenditure components

Exports only return to a moderate expansion path over the course of next year. Despite robust growth in sales markets, exports are again unlikely to provide any stimulus to macroeconomic growth in the current winter half-year. Industrial orders received from abroad improved somewhat in the third quarter but remain at a low level. Correspondingly, according to the ifo

Institute, German exporters are predominantly pessimistic about the near future. The situation is likely to improve slowly only later next year. Against the backdrop of a robust global economy and firming and continuously growing demand from abroad, the export industry should slowly regain traction. However, the competitive environment remains challenging and the pressure to adapt is high. Correspondingly, exports expand at a substantially weaker pace than the sales markets over the entire forecast horizon. German exporters thus continue to concede market share and exports contribute less to economic growth than in previous recovery periods.

With a significant delay, business investment is likewise beginning to recover. The investment environment for German enterprises is currently extremely challenging. The protracted weakness of the export industry and the subdued domestic demand for capital goods, which was also due to the previous monetary policy tightening, led to significant underutilisation of capacity in the manufacturing sector. In addition to the economic headwinds, structural impediments are also weighing on the propensity to invest. Against this backdrop, the sentiment of capital goods producers is still markedly subdued, according to the ifo

Institute, and lending to non-financial corporations likewise remains at a low level. Industrial investment is therefore likely to decline further into the year ahead. Only after the economy has expanded for several quarters, capacity utilisation has improved again and the dampening effects of monetary policy tightening have subsided does business investment return to a path of recovery. As a result, business investment only makes another slight contribution to

GDP

expansion in 2026 and a somewhat stronger one in 2027.

Private consumption grows only slightly at first, but somewhat more strongly from 2026 onwards. Following the erosion in purchasing power caused by high inflation, labour income rises more strongly than consumer prices for some time now. However, this has not yet had a particularly stimulating effect on private consumption, as other headwinds have persisted. Uncertainty – stemming from the ongoing period of economic weakness, the political environment and geopolitical conflicts – is high. In addition, the labour market has recently deteriorated markedly and concerns about job security are likely to have risen. Against this backdrop, private consumption fell well short of the expectations in the June Forecast. It contracted markedly in the second quarter, and increased only slightly in the third quarter despite sharply rising wages, leading to a significant increase in the saving ratio. It is also likely to rise at least slightly in the current quarter. This is indicated by the available indicators, such as the sharp increase in private vehicle registrations in October. According to the GfK

survey, the propensity to purchase was also higher than in the previous quarter on average in October and November 2024. However, the overall

GfK

consumer climate index deteriorated again. Private consumption will grow only slightly next year, as real disposable income will actually decline slightly following its previous sharp rise. This will be caused not only by the weaker labour market, but also the fact that households, faced with the end of tax-free and social contribution-free inflation compensation bonuses and significantly increased social security contributions, will take home even less of their gross pay – which will itself have increased to a lesser extent – than in the current year. However, they are likely to smooth their consumption slightly by lowering their increased saving rate. Real disposable income rises markedly again in 2026 and 2027, mainly due to declining inflation and wages rising somewhat more sharply again. As the economy brightens and the labour market improves again, precautionary motives also subside and the saving ratio declines somewhat further. Private consumption therefore picks up some momentum again.

Housing investment tentatively rebounds from mid-2025. Housing investment has declined significantly in recent years, its level now equalling a low it last reached in 2013.

This picture is more drastic than in the June Forecast, as current housing investment was revised noticeably downwards in August.

The decline has continued and was even stronger than in the June Forecast. However, there are signs that – similar to expectations – the housing market is stabilising and housing investment is slowly approaching its trough. For example, housing prices have recently started to rise again for the first time since 2022. Although construction permits had declined until recently, new orders in housing construction rose for the second time in a row in the third quarter. This stabilisation of demand is likely to be helped by a significant slowdown in the growth of construction costs and by the fact that the effective interest rates on housing loans have already fallen a little in the wake of monetary policy easing. Nevertheless, the general level of demand is still weak. According to

ifo

surveys, more than 50 % of firms in housing construction are still complaining about order shortages. Housing investment is therefore likely to decline slightly in the current quarter and first quarter of 2025 before starting a slow recovery. There is a general demand for additional housing.

This is especially true in major conurbations. In addition to high levels of immigration, this is also due to the rising number of one-person households, which causes an increase in living space used per person.

The comparatively favourable price-to-rent ratio is also likely to have a supportive effect.

Real estate prices fell sharply from mid-2022, while rents increased markedly. The price-to-rent ratio is therefore significantly more favourable than in the years before 2022. In the forecast period, real estate prices rise again somewhat more strongly than rents, but their ratio remains comparatively favourable.

The recovery then picks up a little more momentum in the following two years, driven in particular by more favourable financing costs and improving household incomes. The high demand for energy-efficient renovations of existing properties is another supporting factor. Overall, however, the housing supply will only be expanded to a limited extent. This leads to some upward pressure on house prices. They therefore continue to grow, albeit at significantly lower rates than in the low interest rate period.

Real government demand rises significantly over the forecast horizon. Government investment increases sharply up until 2026 and then falls somewhat in 2027. On the one hand, military spending rises sharply up until 2026. On the other hand, construction investment does not fully maintain its current level, as the fiscal positions of central, state and local government are tighter. Government consumption rises fairly continuously, mainly due to higher spending on health and long-term care.

Real imports grow noticeably again from next year, with the current account surplus falling slightly below 6 % of nominal GDP

The ongoing economic weakness is also reflected in real imports, which are expected to decline again slightly this year. They then go back up again, if moderately, in 2025, followed by more significant increases in 2026 and 2027 as the economic recovery solidifies. As domestic demand is more buoyant than exports, imports exceed the growth in exports over the entire forecast period, especially next year. As terms of trade improve only slightly at the same time, the trade balance (as a share of nominal

GDP

)

declines significantly in 2025 before moving more or less sideways over the remainder of the forecast horizon. This contributes to the fact that the current account surplus, which is expected to fall slightly above 6 % of

GDP

this year, falls slightly below 6 % of

GDP

next year and remains at this level in subsequent years.

Footnotes

This picture is more drastic than in the June Forecast, as current housing investment was revised noticeably downwards in August.
This is especially true in major conurbations. In addition to high levels of immigration, this is also due to the rising number of one-person households, which causes an increase in living space used per person.
Real estate prices fell sharply from mid-2022, while rents increased markedly. The price-to-rent ratio is therefore significantly more favourable than in the years before 2022. In the forecast period, real estate prices rise again somewhat more strongly than rents, but their ratio remains comparatively favourable.

1.2 Temporary marked weakening of labour market

The labour market was impacted noticeably by the ongoing weakness of the German economy – but it remains fairly robust. June expectations of an imminent recovery in the labour market did not come to fruition. Employment growth, which had previously already been muted, turned negative in recent months and unemployment went up more strongly than expected. After many years of very favourable labour market figures, this deterioration appears particularly striking.

Additionally, the data only began to look like this after a certain delay. In particular, the months from June 2024 onwards were revised downwards when the Federal Statistical Office published the employment figures on 30 October 2024. Besides the lower level of employment, this chiefly painted employment growth more negatively than before. See Deutsche Bundesbank (2024b), Chapter 3 “Labour market cooled in the third quarter”.

However, this should not detract from the fact that the labour market essentially remains fairly robust, including compared with previous episodes of weak growth. The level of employment is high and unemployment is relatively low, and with firms caught between persistently weak demand and a demographically-induced structural shortage of skilled workers, they are avoiding major layoffs as far as possible. While firms significantly reduced their use of temporary agency employment, they have so far largely retained their core workforces, thereby also accepting lower labour productivity.

Only the manufacturing sector is making slightly greater use of short-time working arrangements. This instrument serves to bridge short-term demand shortfalls and is less suitable for many firms in the current situation.

In addition, empty working time accounts and low overtime are pushing down average working hours.

The decline due to the persistent trend towards part-time work and a still high level of sick leave is also playing a role.

For demographic reasons, many employees are currently entering retirement. This offers opportunities to shrink headcounts without compulsory redundancies, by not fully replacing staff. The number of vacancies decreased significantly in this context, but is still quite high by historical standards. This is partly because, in the context of structural change, some sectors are benefiting from increased labour demand.

In particular, this refers to demand for healthcare and nursing staff, childcare staff, engineers and

specialists, as well as skilled staff for qualified business services.

Given that the German economy remains stagnant, employment is likely to decline in the current winter half-year as well. The longer business activity remains weak, the more likely it is that there will be increased layoffs in the manufacturing sector, in particular, but also in the trade sector, which is suffering from subdued consumption. This is indicated by the ifo

Institute’s Employment Barometer, which is deep in negative territory here. However, seeing as the sectors benefiting from structural change are likely to continue hiring, the decline in employment should remain limited overall. Other leading indicators, such as the

IAB

labour market barometer, also suggest that the labour market is still fairly resilient overall. Nevertheless, unemployment is likely to see a further moderate increase.

Data that became available after the Forecast was finalised were somewhat better than expected. However, they confirmed the underlying trends in the Forecast, showing a further (albeit only marginal) uptick in unemployment in November and slightly (and primarily in the manufacturing sector) declining employment in October.

Part of the reason for this is that there is less of a match between existing and in-demand jobs and qualifications due to shifts in the economic structure.

The economic recovery gradually taking hold in the course of 2025 is initially unlikely to lead to increased hiring in the labour market. Employment is expected to go down again slightly in 2025. In conjunction with the decline in employment that has been ongoing since mid-2024, there is thus a marked decrease in the average number of persons in employment over 2025. However, existing staff should be put to greater use again over the course of the year, clawing back some of the depressed level of productivity and working hours. Against this backdrop, unemployment continues to rise well into next year. The labour market outlook for 2025 is thus distinctly weaker than in the June Forecast.

Over the remainder of the forecast period, the labour market recovers again, but remains less tight than expected in previous forecasts. From 2026 onwards, the economic recovery leads to rising employment, falling unemployment and an increasing shortage of skilled workers. Working hours and labour productivity also recover further. The labour market is thereby faced with the challenging situation in which the labour supply shrinks from 2026 for reasons of demographics, even though individual labour force participation continues to rise and the assumed level of immigration is significant.

In the year to date, immigration has been somewhat lower than expected in the June Forecast. According to the Federal Statistical Office’s migration statistics, a net figure of 272,000 people moved to Germany up to August, around one-third less than in the same period of the previous year. For 2024 as a whole, a net figure of 480,000 persons is expected, which will decline further in the subsequent years (2025: 400,000 persons, from 2026: 300,000 persons per year).

The pace at which refugees are being integrated into the labour market had recently improved markedly.

See Deutsche Bundesbank (2024b), Chapter 3 “Labour market cooled in the third quarter”.

However, it takes time and effort to integrate both immigrants and the unemployed, of whom greater job and geographical mobility is required due to structural change. Unemployment therefore declines only moderately and, in 2027, will not yet have returned to its lowest levels from before the outbreak of the

COVID

19 pandemic.

1.3 Much weaker wage growth in future after another strong year in 2024

As of next year, negotiated wages lose significant momentum in view of lower inflation rates, prolonged economic weakness and the deterioration in the labour market. Since the Forecast for Germany in June, negotiated wage agreements up to October have largely been higher than expected. However, employees have also ended up having to adjust their wage expectations in part to the changed economic environment. The metals and electrical engineering sector, for example, recently agreed on wage increases that are distinctly lower than the expectations expressed in the June Forecast; this was due to persistently weak economic activity and the pressure to adjust that the sector is facing.

Survey results likewise point to major burdens in such a scenario. According to a special survey among manufacturing firms conducted before the

election by

ifo

Institute, 44 % of German industrial firms expected a negative impact on their business as a result of Donald Trump’s election; 5 % expected a positive impact, and 51 % expected it to make no difference who won the election; see

CESifo

(2024).

Lower inflation rates, sluggish economic activity and weakened labour demand also suggest that, in general, more moderate agreements will be reached in the coming months than in previous years. Highly heterogeneous levels of activity in different sectors are thus likely to come to the fore.

Ongoing labour market shortages are evident in some of the better-performing services sectors. The negotiating parties in those sectors will therefore probably tend to agree on higher wage increases. See

Deutsche Bundesbank

(2024d). All past pay agreements included in the Bundesbank’s negotiated wage statistics (around 550 collective wage agreements and provisions governing civil servant pay) are factored into the forecasts of negotiated wage increases. They are extrapolated beyond their contractual terms, taking into account the overall economic situation and industry-specific factors.

Next year, the elimination of the inflation compensation bonuses also dampens wage growth, as these are only partly replaced by regular wage increases. Wage growth sees a sharp drop to 2.5 % on an annual average. In 2026, negotiated wages grow somewhat more strongly again. This is still under the influence of large agreements running for long terms that were reached during the period of high inflation, however; these are no longer relevant in 2027. The broadly normalised level of activity and the once again tighter labour market then lead to historically slightly above average growth in negotiated wages of 2.6 %. Compared with the June Forecast, the latest agreements, in particular, bring about a small upward revision in this year's forecast of negotiated wages. The weaker outlook for economic activity and the labour market only becomes more evident in subsequent years; the increase in negotiated wages for 2025 and 2026 has therefore been revised downwards noticeably.

Actual earnings growth is initially weaker than that of negotiated wages. In the current year, growth in actual earnings is once again very high by historical standards, but it is already below that of negotiated wages. This is because actual earnings respond more quickly to the significant changes in macroeconomic conditions. On account of sluggish economic activity and the weakening labour market, for example, industrial groups reduce their profit-sharing and the number of paid overtime hours is reduced to a small amount. Only in 2027, when economic activity picks up and labour market tightness increases, do actual earnings again show slightly stronger growth than negotiated earnings. Labour costs, measured as compensation per employee, rise somewhat more strongly than actual earnings, especially in the coming year. This is due to an additional cost surge for employers in the form of higher social contribution rates.

See the

supplementary information on the underlying conditions for this Forecast

. See also Chapter 2 “Outlook for public finances”.

Domestic inflation as measured by the GDP

deflator declines to 2 % by 2027 on the back of profit margins normalising and an easing of pressure from unit labour costs.

As in the previous year, economic output is slightly lower this year with employment still robust overall and wages rising strongly. As a result, domestic price pressures from unit labour costs remain very high. However, firms have been cushioning this pressure through lower profits for about a year now. In previous years, they were still able to expand their profit margins strongly, but the underlying conditions for this have largely changed. Aggregate demand, in particular, is now significantly weaker. Tighter monetary policy is likely to have been one factor here. Against this backdrop, aggregate profit margins fall strongly this year, roughly returning to their pre-pandemic levels. As measured by the

GDP

deflator, the previously significant domestic inflation will therefore fall significantly to 3.0 %, despite the substantial rise in unit labour costs. In the remainder of the forecast period, profit margins decline only marginally before stabilising in 2027, meaning that their contribution to further disinflation is only small. However, the rise in unit labour costs declines markedly from next year, as wage growth recedes and labour productivity slowly recovers. Against this backdrop, domestic inflation continues to decline markedly, to 2.0 % in 2027.

1.4 The inflation rate is still elevated in 2025, but then gradually returns to 2 %.

The inflation rate was lower than expected recently. Consumer price inflation, as measured by the HICP

stood at 2.4 % in November, 0.8 percentage point below the rate expected in the June Forecast for Germany, primarily because energy prices fell more sharply than expected. Food prices rose much more strongly than anticipated, however. The rate excluding energy and food (core rate) was roughly in line with expectations. Price increases for services tended to be stronger than expected, whilst inflation for non-energy industrial goods declined somewhat faster than projected. At 2.5 % in the current year overall, the inflation rate is expected to be slightly lower than expected in June.

HICP components in Germany: forecasts and actual developments

Inflation remains elevated next year, mainly due to service price increases abating only slowly. The weak economy is generally having a price dampening effect on services, too. However, the previously sharp rise in wages is still exerting upward pressure on consumer prices with a certain time lag.

See

Deutsche Bundesbank

(2019a).

Particularly strong price increases as of the beginning of 2025 were announced for public transport and insurance services.

The price for the “

Deutschland-Ticket

” is set to go up from €49 to €58 in January 2025. Furthermore, the Association of Private Health Insurance Funds (

Verband der privaten Krankenversicherungen – PKV

) predicts exceptionally strong increases in contributions at the turn of the year. Taken together, alone the announcement of these two price increases, adjusted for the price increase generally expected in these areas, is likely to lead to a rise of + ¼ percentage point in the core rate in all months of 2025 (headline inflation: around + 0.2 percentage point).

The rise in rents, too, is initially expected to be higher than average by historical standards, as existing rents are only slowly adjusting to the cost surges of recent years. In addition, forward-looking booking data suggest further strong price increases for package holidays in the coming months.

In the package holidays subcomponent of the

HICP

prices are recorded according to their travel date, not the booking date; see

Schnorrenberger, Schwind

and

Wieland

(2024).

By contrast, inflation for non-energy industrial goods has already fallen markedly and is likely to decline further somewhat, partly in view of weak demand. The core rate overall is expected to decline from 3.3 % in 2024 to 2.4 % in 2025. By contrast, food prices will rise more strongly again next year. This is because agricultural producer prices are markedly higher, especially for milk fats. In addition, the recent very high wage growth in the retail sector is likely to still have an impact. Lastly, in 2025, energy prices no longer dampen the headline inflation rate as strongly as during this year. Energy commodity futures prices are on a slight downturn but this is partly offset by a further increase in the carbon price and a substantial rise in network charges for gas transmission.

See

Deutsche Bundesbank

(2019b).

Headline

HICP

inflation therefore drops only marginally to 2.4 % in 2025.

In the remainder of the forecast period, the inflation rate in Germany gradually returns to 2 %. Monetary policy tightening still has an impact and the pressure exerted by unit labour costs continues to ease. The core rate therefore initially drops to 1.9 % in 2026. With the recovery in economic activity and the return to an almost normal level of aggregate capacity utilisation, it rises slightly to 2.0 % in 2027. Food inflation declines somewhat again in 2026 and 2027, but still remains elevated. This is because prices for agricultural commodities and labour costs continue to generate above-average price impulses, albeit with a declining tendency. Energy prices go back up noticeably in 2026, especially as the national carbon price continues to rise, while the fall in market prices for energy is assumed to be significantly less strong than in the previous year. Energy components are then expected to have a slight dampening effect again in 2027. This is mainly due to the assumption that the national carbon price will be transferred to the European ETS2

and that a slightly lower carbon price will therefore be set.

It is assumed that the price will thus fall from €65 to €59 per tonne of CO₂ For 2027, this corresponds to the price ceiling of €45 for 2020 prices as set out in the

ETS2

system.

Headline inflation falls to 2.1 % in 2026 and 1.9 % in 2027. This means that over the entire forecast horizon the outlook for inflation improved slightly compared to the June Forecast.

Table 1.3b: Revisions since the June 2024 forecast
Item	2023	2024	2025	2026
Harmonised Index of Consumer Prices
December 2024 forecast	6.0	2.5	2.4	2.1
June 2024 forecast	6.0	2.8	2.7	2.2
Difference (in percentage points)	0.0	- 0.3	- 0.3	- 0.1

2 Outlook for public finances

There is only a slight fall in the deficit ratio from 2.6 % in 2023 to 2.5 % in 2024, even though the extensive burdens caused by the energy price brakes have dropped (see the supplementary information entitled Underlying conditions for the Forecast for Germany). This is because spending on the Armed Forces Fund and the Climate Fund, staff and interest, as well as on pensions, healthcare and long-term care, is rising sharply. In addition, tax refunds stemming from a court ruling on capital gains tax are placing a one-off burden.

In March of this year, the Federal Fiscal Court ruled that foreign investment funds that invested in German enterprises had been unlawfully subject to capital gains tax in the past. The national accounts record the sum of expected repayments, at just under ¼ % of

GDP

in 2024, as capital transfers.

At the same time, revenue is still showing quite dynamic growth, especially as wages are rising strongly and contribution rates to the social security funds are going up.

In 2025, the deficit ratio remains unchanged at 2.5 %, although the revenue and expenditure ratios continue to rise significantly. Significant budgetary relief compensates for corresponding burdens elsewhere. On the one hand, significant additional revenue is generated by the fact that fees subject to compulsory contributions are taking the place of tax- and social contribution-exempt inflation compensation bonuses in some cases. In addition, the court ruling on capital gains taxes is no longer applicable, and transfers to Ukraine are less of a burden. On the other hand, the weak economy is becoming more noticeable as the nominal reference variables of taxes and social contributions rise more slowly. Furthermore, in some areas expenditure is still growing at dynamics similar to 2024. The deficit in the social security funds shows little change on balance: health and long-term care insurance schemes are increasing contribution rates once again, thus reducing their deficits overall. By contrast, the unemployment insurance scheme and, above all, the pension insurance scheme are expanding their deficits. Reserves are used to prevent contribution rates from rising here as well in order to offset the deficit.

The deficit ratios for 2026 and 2027 are both 2.4 %, with only a small change in the revenue and expenditure ratios. The Forecast assumes that central, state and local government spending will lose momentum due to budgetary strains, especially in the areas of personnel, intermediate consumption and investment. Growth in expenditure on pensions, healthcare and long-term care will continue to outpace that of the reference variable for social security contributions. The health and long-term care insurance schemes continue to avoid incurring deficits through renewed increases in contribution rates. However, there is significant growth in the pension insurance scheme’s deficit.

The structural deficit ratio remains relatively stable at around 2 % over the forecast horizon from 2024 to 2027. This ratio factors out temporary influences (primarily crisis measures and economic activity). Around three-quarters of the structural deficit is attributable to central government (including its off-budget entities). Using its own calculation method, central government initially computes significantly higher cyclical burdens on its budget and first uses up its disposable reserves. This makes it easier for central government to comply with the debt brake borrowing limit, as cyclical deficits and deficits financed from reserves are not counted towards the limit. In 2026 and 2027 in particular, the results forecast here indicate a marked overshooting of the borrowing limit, however. In addition, the Armed Forces Fund is estimated to record a deficit of ½ % of GDP

in each of these two years. At the end of 2027, the forecast expects it to still have a residual borrowing authorisation of ¼ % of

GDP

There is a moderate decline in the Maastricht debt ratio from 62.9 % at the end of 2023 to 61.7 % at the end of 2027. Central, state and local government deficits lead to a significant increase in debt. Nominal GDP

growth in the denominator is not sufficient to stabilise the ratio. However, the government will be repaying debt related to the coronavirus and energy price assistance loans and bad bank portfolios from the financial crisis. The deficits in the social security funds do not increase government debt, as they are financed from reserves. From today’s perspective, the share of

debt (especially that incurred through

NGEU

)

which Germany ultimately has to repay on a pro rata basis is just over 2 % of

GDP

in 2027. This is not included in the Maastricht debt ratio.

3 Risk assessment

The macroeconomic forecast presented here is subject to a number of uncertainties. Risks currently exist, in particular, in relation to growing protectionism, geopolitical conflicts and the impact of structural change on the German economy. Following the Bundestag elections, fiscal and economic policy could also see significant change. All in all, risks to economic growth are currently tilted to the downside and risks to inflation to the upside.

Rising geopolitical tensions or increased protectionist measures entail significant downside risks to economic output and upside risks to inflation. Should Russia’s war against Ukraine or the conflicts in the Middle East intensify or spread, this could constrict the supply of energy commodities in the global market and disrupt supply chains. Via rising import prices, this would directly increase inflation in Germany and constrain economic activity. Growing trade policy tensions would probably have similar effects. This threat will become fairly imminent if the incoming US

administration implements its announced trade policy plans – especially in the event of huge tariff increases and possible retaliatory measures. In such a risk scenario, the German economy would probably suffer considerably; see the supplementary information below.

Survey results likewise point to major burdens in such a scenario. According to a special survey among manufacturing firms conducted before the

election by

ifo

CESifo

(2024).

Supplementary information

The possible impact on the German economy of measures announced by the incoming US
administration

The re-election of Donald Trump as US

President could well initiate a drastic pivot of the nation’s trade and economic policy.

The plans announced in the run-up to the

election are pointing in that direction. At present, however, they are not sufficiently specified, nor is it certain enough that they will be implemented, for them to be included in the baseline forecast. For the purpose of the risk assessment, we gauge the potential impact of a more restrictive trade policy and other measures put forward by the incoming

administration.

In particular, the drastic tariff increases on the table are likely to play an important role in this. Tariffs on US

imports from China, for instance, could rise to 60 %. For products from Germany and other economies, the new tariff rate could be 10 %.

This corresponds to an increase of just under 49 percentage points in the effective average tariffs on Chinese products. Tariffs on products from other regions of the world would be raised by an average of just under 9 percentage points.

In some cases, designated members of the incoming

administration have raised the prospect of even more draconian measures.

For instance, general tariffs could also be raised, by up to 20 percentage points. An additional 25 % could be tacked onto tariffs on Mexican and Canadian products unless

demands for greater border security and the fight against drug trafficking are addressed.

Retaliatory measures by trading partners would then be likely. As a highly export-oriented country whose exporters are relatively strongly exposed to the

market, Germany may be more affected than other economies by the consequences of a restrictive

trade policy.

The potential impact of a risk scenario on the German economy is quantified below. The scenario assumes US

tariffs of 60 % on imports from China and 10 % on products from Germany and other economies, as well as tit-for-tat retaliation by trading partners.

It is assumed that, beginning in the first quarter of 2025, tariffs will be gradually raised up to the assumed levels within two years. For their part, trading partners are assumed to retaliate by imposing tariffs of the same size on imports from the United States. The assumption of tit-for-tat retaliation is based on the experience gained from the 2018

China trade war. It is expressly neither an interpretation of statements from major

trading partners’ governments nor a policy recommendation. It is assumed that tariffs between the

and China will remain unchanged.

It also takes into account tax relief promised by President-elect Trump and the Republican Party during the election campaign.

Additional tax relief for households is assumed as from the fourth quarter of 2025. Income from overtime hours worked and social security benefits are assumed to be exempt from tax in future. In addition, the corporate tax rate is reduced from 21 % to 15 % in the scenario. The prospect has been raised of extending the tax cuts under the Tax Cuts and Jobs Act signed into law during the first Trump administration and set to expire at the end of 2025; this extension already forms part of the forecast baseline and is therefore not assessed in this risk scenario. For a quantification of the fiscal costs of these measures, see Committee for a Responsible Federal Budget (2024).

In addition, given statements to that effect from the incoming

administration, it considers the consequences of the mass deportation of immigrants living and working in the United States.

The scenario assumes that, from the third quarter of 2025 onwards, undocumented immigrants will be deported on a mass scale, reducing the labour force by 1.3 million by the end of 2027. The forecast baseline already assumes that the strong influx of immigration to the United States in recent years will come to a halt under President-elect Trump.

Finally, it is assumed that the macroeconomically relevant uncertainty will increase in this environment.

The analyses are based on changes in financial market uncertainty. This indicator is based on the volatility of the non-predictable component of a wide range of macroeconomic data and financial market variables. For a discussion of the conceptual advantages of examining financial market uncertainty over alternative approaches, see Deutsche Bundesbank (2020).

The risk scenario ignores the potential macroeconomic effects that other measures, such as new deregulation initiatives, could have in the United States.

The macroeconomic implications of US

policy measures for Germany are estimated using the National Institute Global Econometric Model (NiGEM) and the Bundesbank’s macroeconomic model (BbkM-

NiGEM comprehensively models global trade linkages and can also illustrate the implications of trade policy disruptions.

NiGEM is a semi-structural model designed by the National Institute of Economic and Social Research that models the economies of most

OECD

countries and major emerging market economies (see Hantzsche et al. (2018)). A current model extension expressly permits the simulation of trade policy measures. See Bernard et al. (2024).

It can do the same for impacts on Germany. However, the model does not explicitly focus on the German economy. For this reason, the BbkM-

model deployed for the Bundesbank’s macroeconomic forecasts is also used to obtain a view of the German economy specifically. The simulations using BbkM-

are based on the effects relating to Germany’s international environment identified by NiGEM.

Any feedback the macroeconomic effects in Germany from the calculations using BbkM-

have on or via the global environment is thus not explicitly taken into account. In the simulations with BbkM-

, it is implicitly regarded as part of the assumptions derived from NiGEM regarding the external environment (for details on BbkM-

, see Haertel et al. (2022)). Both models have been used for a wide range of simulation and scenario analyses, including some as a combination of NiGEM (for the international environment) and BbkM-

(for the German economy); see Deutsche Bundesbank (2022b, 2024e).

The effects on the German economy triggered by heightened uncertainty are estimated using a structural vector autoregression

(

SVAR

)

model.

The

SVAR

model comprises a stock price index, a measure of financial market uncertainty, a shadow interest rate as a measure of monetary policy orientation, the

HICP

the unemployment rate and quarterly real

GDP

To generate impulse responses, the recursively identified uncertainty shock is calibrated according to its movement during the first Trump administration. The

SVAR

results are added to the simulation results of NiGEM and BbkM-

regarding

GDP

and inflation in Germany.

According to the NiGEM simulations, protectionist measures, in particular, noticeably dampen economic activity in the United States. In the simulations, losses in consumer purchasing power and increased costs for intermediate inputs outweigh US

industry’s price competitiveness in the domestic market. In addition, the retaliatory tariffs affect the profitability of

firms’ foreign business.

Simulation studies by Bernard et al. (2024), McKibbin et al. (2024) and Goldman Sachs (2024a) also clearly assess the macroeconomic effects of a more restrictive trade policy as negative from the perspective of the United States. Analyses by the International Monetary Fund (2024) also point to considerable downside risks to

economic growth in a similar scenario.

The reduced labour supply also weighs on

GDP

Although tax relief counteracts this, the negative impact of tariff increases, in particular, clearly predominates. Overall, the

economy suffers annual growth losses averaging around 0.7 percentage point from 2025 to 2027. The tariff-induced rise in import and consumer prices and second-round effects via higher wages drive up inflation in the United States sharply. Inflation already exceeds the baseline by 0.4 percentage point in 2025 and by more than 1.5 percentage points in 2026 and 2027.

Simulation calculations with other models produce, in some cases, significantly lower inflation effects; see, for example, Goldman Sachs (2024a). In other studies, including McKibbin et al. (2024), by contrast, they are even larger. The magnitude of the inflation effects largely depends on how wages respond to the rise in the cost of living caused by the additional tariffs.

Without a significant monetary policy tightening in the United States, the surge in inflation is even stronger and more persistent. In anticipation of interest rate hikes, the

dollar also sees a substantial and immediate appreciation.

The German economy is also likely to suffer considerably, across models, from such a US

policy shift.

Its strong reliance on exports makes it particularly vulnerable to the decline in foreign demand resulting from the global trade losses triggered by the restrictive trade policy. The heightened uncertainty further burdens the German economy. The depreciation of the euro resulting from the simulations, which, in and of itself, strengthens price competitiveness, cannot compensate for this. As a result, according to the simulations with BbkM-

and NiGEM,

GDP

growth is significantly lower than in the baseline forecast, with differences between the models regarding the timeline of growth losses (see Chart 1.15). According to NiGEM, the burdens would already become clearly noticeable in 2025 but last for a shorter duration. Overall, economic output in Germany in 2027 would be 1.4 % below the baseline according to BbkM-

and 1.3 % below the baseline according to NiGEM. The simulation results presented here thus point, across models, to considerable downside risks to economic growth in Germany.

Other studies show

GDP

effects in Germany of similar magnitude (see Dullien et al. (2024), Goldman Sachs (2024b), Obst et al. (2024), and Zandi et al. (2024)) or a smaller magnitude (see Felbermayr et al. (2024)). However, it should be noted that comparability may be limited because the specific design (e.g. the size and timing of the measures or the incorporation of uncertainty effects) differs in some cases in the scenario analyses. The effects of inflation, which are the focus of only a few studies, need to be seen in this context, too. Obst et al. (2024) report slightly negative effects on German inflation, citing capacity underutilisation and weak economic development as the dominant channel in their scenario. Goldman Sachs (2024b) identifies small positive effects on inflation but looks only at the euro area as a whole.

Potential impact on the rate of change of real GDP in Germany in the risk scenario*

The inflation effects differ significantly more strongly in the simulation calculations. According to BbkM-DE

, the inflation effects in Germany would be small in the forecast period up to 2027, with annual inflation being 0.1 to 0.2 percentage point higher (Chart 1.16, left panel). In NiGEM, on the other hand, the inflation rate rises sharply by around 1.5 percentage points, especially in 2025, but in 2026, the inflation rate is still 0.6 percentage point higher (Chart 1.16, right panel). The main reason for the large differences is the rapid and extensive transmission of exchange rate effects and retaliatory tariffs to domestic consumer prices in NiGEM. This is also due to the assumption that all imports are invoiced in

dollars. This is why the depreciation of the euro against the

dollar is directly passed through to the prices of imports from all countries. By contrast, BbkM-

takes account of the fact that only part of foreign trade is settled in

dollars. Accordingly, the direct rise in import prices is considerably lower in that model.

According to

Eurostat

data for 2023, only around one-quarter of German exports outside the euro area and slightly less than one-half of imports from non-euro area countries are settled in

dollars. In addition, higher foreign prices are passed through to German import prices to a lesser extent in BbkM-

than in NiGEM.

The transmission of this impulse from import prices to consumer prices is likewise significantly weaker and more gradual in BbkM-

. In addition, in NiGEM, quite strong second-round effects via wages occur relatively swiftly. This further increases inflation and ensures a fairly high persistence of the inflation effect. This effect is also present in BbkM-

, but is weaker.

Conceptual differences between BbkM-

and NiGEM are also evident here. In NiGEM, the immediate wage response to price changes is already significantly stronger than in BbkM-

. In BbkM-

, the pass-through of wage changes to prices is also estimated to be weaker than in NiGEM. For more on the pass-through of wage developments to price developments in Germany including simulation calculations using BbkM-

, see also Deutsche Bundesbank (2019a).

Potential impact on the inflation rate in Germany in the risk scenario*

The simulation calculations point to upside risks for inflation developments, although their extent is highly uncertain. Estimates using BbkM-DE

, which reflects in quite significant detail the specific characteristics of the German economy, point to rather low effects. The strong inflation effects in the NiGEM simulations are likely to represent an upper limit. However, the estimates with NiGEM suggest that the pass-through of exchange rate changes to consumer prices could also be significantly stronger than in BbkM-

and other models.

See Ortega and Osbat (2020).

Together with the larger second-round effects via wages, the overall inflation effects in NiGEM are considerably higher than in BbkM-

. Experience gained in the recent period of inflation also shows that large cost shocks can be reflected in consumer prices at a higher intensity than moderate increases in costs.

See, for example, Cavallo et al. (2024).

Moreover, the exchange rate pass-through to consumer prices is likely to intensify in an uncertain macroeconomic environment and with rising inflation.

See Carrière-Swallow et al. (2024).

Ultimately, this supplementary information illustrates that scenario analyses of this kind often produce a cross-model consensus on the real economic impact, while the inflation effects diverge much more strongly.

Footnotes

This corresponds to an increase of just under 49 percentage points in the effective average tariffs on Chinese products. Tariffs on products from other regions of the world would be raised by an average of just under 9 percentage points.
For instance, general tariffs could also be raised, by up to 20 percentage points. An additional 25 % could be tacked onto tariffs on Mexican and Canadian products unless US
demands for greater border security and the fight against drug trafficking are addressed.
It is assumed that, beginning in the first quarter of 2025, tariffs will be gradually raised up to the assumed levels within two years. For their part, trading partners are assumed to retaliate by imposing tariffs of the same size on imports from the United States. The assumption of tit-for-tat retaliation is based on the experience gained from the 2018 US
-China trade war. It is expressly neither an interpretation of statements from major US
trading partners’ governments nor a policy recommendation. It is assumed that tariffs between the EU
and China will remain unchanged.
Additional tax relief for households is assumed as from the fourth quarter of 2025. Income from overtime hours worked and social security benefits are assumed to be exempt from tax in future. In addition, the corporate tax rate is reduced from 21 % to 15 % in the scenario. The prospect has been raised of extending the tax cuts under the Tax Cuts and Jobs Act signed into law during the first Trump administration and set to expire at the end of 2025; this extension already forms part of the forecast baseline and is therefore not assessed in this risk scenario. For a quantification of the fiscal costs of these measures, see Committee for a Responsible Federal Budget (2024).
The scenario assumes that, from the third quarter of 2025 onwards, undocumented immigrants will be deported on a mass scale, reducing the labour force by 1.3 million by the end of 2027. The forecast baseline already assumes that the strong influx of immigration to the United States in recent years will come to a halt under President-elect Trump.
The analyses are based on changes in financial market uncertainty. This indicator is based on the volatility of the non-predictable component of a wide range of macroeconomic data and financial market variables. For a discussion of the conceptual advantages of examining financial market uncertainty over alternative approaches, see Deutsche Bundesbank (2020).
NiGEM is a semi-structural model designed by the National Institute of Economic and Social Research that models the economies of most OECD
countries and major emerging market economies (see Hantzsche et al. (2018)). A current model extension expressly permits the simulation of trade policy measures. See Bernard et al. (2024).
Any feedback the macroeconomic effects in Germany from the calculations using BbkM-DE
have on or via the global environment is thus not explicitly taken into account. In the simulations with BbkM-DE
, it is implicitly regarded as part of the assumptions derived from NiGEM regarding the external environment (for details on BbkM-DE
, see Haertel et al. (2022)). Both models have been used for a wide range of simulation and scenario analyses, including some as a combination of NiGEM (for the international environment) and BbkM-DE
(for the German economy); see Deutsche Bundesbank (2022b, 2024e).
The SVAR
model comprises a stock price index, a measure of financial market uncertainty, a shadow interest rate as a measure of monetary policy orientation, the HICP
, the unemployment rate and quarterly real GDP
. To generate impulse responses, the recursively identified uncertainty shock is calibrated according to its movement during the first Trump administration. The SVAR
results are added to the simulation results of NiGEM and BbkM-DE
regarding GDP
and inflation in Germany.
Simulation studies by Bernard et al. (2024), McKibbin et al. (2024) and Goldman Sachs (2024a) also clearly assess the macroeconomic effects of a more restrictive trade policy as negative from the perspective of the United States. Analyses by the International Monetary Fund (2024) also point to considerable downside risks to US
economic growth in a similar scenario.
Simulation calculations with other models produce, in some cases, significantly lower inflation effects; see, for example, Goldman Sachs (2024a). In other studies, including McKibbin et al. (2024), by contrast, they are even larger. The magnitude of the inflation effects largely depends on how wages respond to the rise in the cost of living caused by the additional tariffs.
Other studies show GDP
effects in Germany of similar magnitude (see Dullien et al. (2024), Goldman Sachs (2024b), Obst et al. (2024), and Zandi et al. (2024)) or a smaller magnitude (see Felbermayr et al. (2024)). However, it should be noted that comparability may be limited because the specific design (e.g. the size and timing of the measures or the incorporation of uncertainty effects) differs in some cases in the scenario analyses. The effects of inflation, which are the focus of only a few studies, need to be seen in this context, too. Obst et al. (2024) report slightly negative effects on German inflation, citing capacity underutilisation and weak economic development as the dominant channel in their scenario. Goldman Sachs (2024b) identifies small positive effects on inflation but looks only at the euro area as a whole.
According to Eurostat
data for 2023, only around one-quarter of German exports outside the euro area and slightly less than one-half of imports from non-euro area countries are settled in US
dollars. In addition, higher foreign prices are passed through to German import prices to a lesser extent in BbkM-DE
than in NiGEM.
Conceptual differences between BbkM-DE
and NiGEM are also evident here. In NiGEM, the immediate wage response to price changes is already significantly stronger than in BbkM-DE
. In BbkM-DE
, the pass-through of wage changes to prices is also estimated to be weaker than in NiGEM. For more on the pass-through of wage developments to price developments in Germany including simulation calculations using BbkM-DE
, see also Deutsche Bundesbank (2019a).
See Ortega and Osbat (2020).
See, for example, Cavallo et al. (2024).
See Carrière-Swallow et al. (2024).

A higher carbon price could increase inflation. This forecast assumes a decline in the carbon price in 2027 from the national price cap for 2026 (€65 per tonne of CO₂) to the target price cap of €59 per tonne when the European emissions trading system ETS2

is launched. As the

ETS2

price will generally be formed on the market and the volume of allowances, including those released from the market stability reserve, is limited, it is possible that this cap may be exceeded. The assumed dampening effect on energy prices could therefore fail to materialise, or prices could even go up. Simulations suggest that, to achieve the climate protection targets, a greater reduction in emissions is needed than would appear achievable with the carbon prices planned thus far.

If the planned carbon price path remains unchanged and the energy efficiency gains over the past 30 years are extrapolated, the Bundesbank’s model simulations from April 2024 conclude that emissions reductions will not meet the targets; see Deutsche Bundesbank (2024f).

If the volume of

ETS2

allowances were set in accordance with the target, this could result in a higher price despite use of the market stability reserve. Should

ETS2

prices turn out to be markedly higher, this would increase inflation and tend to dampen economic output.

The structural changes in Germany and abroad could have an even greater impact on the German economy and dampen potential output more strongly than previously estimated. The quantification of this impact on the German economy and estimated potential output is subject to a high level of uncertainty. This forecast (like previous ones) already contains marked downward revisions of potential output, which could turn out later to have been too large.

For example, if productivity were to be more positively affected by digitalisation than expected – say, through the use of artificial intelligence. Capital input could also turn out to be greater, e.g. due to higher investment in green technologies as part of the transition to a net-zero economy.

Nevertheless, there is a risk that some of the structural problems will prove even more burdensome, or the adjustment processes even more lengthy, than currently expected. This would further diminish growth opportunities for the German economy and dampen the

GDP

outlook. For example, the weakness in productivity could last longer, the German export industry could benefit even less from growing sales markets, or private investment could decline more sharply still. Private consumption could then turn out to be weaker, as the labour market would probably experience greater cooling and wage growth would be lower. If the latter were to outweigh weaker productivity, this would also dampen inflation. In view of the low potential growth and possible large additional adverse shocks ahead, the German economy is closer to a recession – in the sense of an overall significant, longer lasting and broad-based decline in economic output, with persistent underutilisation of aggregate capacity.

Table 1.5: Key figures of the macroeconomic forecast Year-on-year percentage change, calendar adjusted¹
Item	2024	2025	2026	2027
GDP (real)	- 0.2	0.2	0.8	0.9
GDP (real, unadjusted)	- 0.2	0.1	1.1	1.0
Components of real GDP
Private consumption	0.1	0.4	0.8	0.7
Memo item: Saving ratio	11.5	11.1	10.9	10.7
Government consumption	2.4	1.6	1.3	1.4
Gross fixed capital formation	- 2.7	- 0.6	1.6	1.3
Business investment²	- 2.7	- 1.3	0.4	1.5
Private housing construction investment	- 4.9	- 1.0	1.6	2.0
Exports	- 0.6	- 0.8	1.8	2.1
Imports	- 0.1	1.1	2.3	2.4
Memo item: Current account balance³	6.1	5.7	5.7	5.7
Contributions to GDP growth⁴
Domestic final demand	0.0	0.4	1.0	1.0
Changes in inventories	0.7	0.5	0.0	0.0
Exports	- 0.2	- 0.3	0.7	0.9
Imports	0.0	- 0.4	- 0.9	- 0.9
Labour market
Total number of hours worked⁵	- 0.3	0.0	0.7	0.5
Employed persons⁵	0.2	- 0.4	0.3	0.1
Unemployed persons⁶	2.8	3.0	2.8	2.7
Unemployment rate⁷	6.0	6.3	6.0	5.7
Memo item: ILO unemployment rate⁸	3.5	3.9	3.7	3.5
Wages and wage costs
Negotiated wages⁹	6.1	2.5	2.9	2.6
Gross wages and salaries per employee	5.1	2.5	2.6	2.7
Compensation per employee	5.1	3.0	2.7	2.8
Real GDP per employed person	− 0.3	0.6	0.6	0.8
Unit labour costs¹⁰	5.5	2.4	2.2	2.0
Memo item: GDP deflator	3.0	2.4	2.1	2.1
Consumer prices¹¹	2.5	2.4	2.1	1.9
Excluding energy	3.2	2.8	2.1	2.2
Energy component	- 3.1	- 0.7	2.3	- 0.6
Excluding energy and food	3.3	2.4	1.9	2.0
Food component	2.8	4.4	2.9	2.8
Residential real estate prices	- 1.9	2.0	2.2	2.2
Sources: Federal Statistical Office (up to Q3 2024), Federal Employment Agency, Eurostat . Annual figures for 2024 to 2027 are Bundesbank forecast. 1 If calendar effects present. 2 Private non-residential fixed capital formation. 3 As a percentage of nominal GDP . 4 In arithmetical terms, in percentage points. Discrepancies in the totals are due to rounding. 5 Domestic concept. 6 In millions of persons (Federal Employment Agency definition). 7 As a percentage of the civilian labour force. 8 Internationally standardised per ILO definition, Eurostat differentiation. 9 Unadjusted figures, monthly basis. Pursuant to the Bundesbank’s negotiated wage index.10 Ratio of domestic compensation per employee to real GDP per employed person. 11 Harmonised Index of Consumer Prices (HICP ), unadjusted figures.

Table 1.6: Key figures of the macroeconomic forecast – non-calendar adjusted Year-on-year percentage change
Item	2024	2025	2026	2027
GDP (real)	- 0.2	0.1	1.1	1.0
GDP (real, calendar adjusted)	- 0.2	0.2	0.8	0.9
Components of real GDP
Private consumption	0.1	0.2	0.9	0.8
Memo item: Saving ratio	11.5	11.1	10.9	10.7
Government consumption	2.4	1.6	1.3	1.4
Gross fixed capital formation	- 2.9	- 0.7	2.2	1.6
Business investment¹	- 2.8	- 1.4	1.1	2.0
Private housing construction investment	- 5.0	- 1.2	2.2	2.4
Exports	- 0.7	- 0.9	2.4	2.4
Imports	- 0.2	0.9	2.8	2.5
Memo item: Current account balance²	6.1	5.6	5.7	5.8
Contributions to GDP growth³
Domestic final demand	- 0.1	0.4	1.2	1.1
Changes in inventories	0.1	0.5	0.0	- 0.1
Exports	- 0.3	- 0.4	1.0	1.0
Imports	0.1	- 0.4	- 1.1	- 1.0
Labour market
Total number of hours worked⁴	- 0.3	- 0.1	1.1	0.7
Employed persons⁴	0.2	- 0.4	0.3	0.1
Unemployed persons⁵	2.8	3.0	2.8	2.7
Unemployment rate⁶	6.0	6.3	6.0	5.7
Memo item: ILO unemployment rate⁷	3.5	3.9	3.7	3.5
Wages and wage costs
Negotiated wages⁸	6.1	2.5	2.9	2.6
Gross wages and salaries per employee	5.1	2.5	2.6	2.7
Compensation per employee	5.1	3.0	2.8	2.8
Real GDP per employed person	- 0.4	0.5	0.8	0.9
Unit labour costs⁹	5.5	2.5	1.9	1.9
Memo item: GDP deflator	3.0	2.4	2.2	2.1
Consumer prices¹⁰	2.5	2.4	2.1	1.9
Excluding energy	3.2	2.8	2.1	2.2
Energy component	- 3.1	- 0.7	2.3	- 0.6
Excluding energy and food	3.3	2.4	1.9	2.0
Food component	2.8	4.4	2.9	2.8
Residential real estate prices	- 1.9	2.0	2.2	2.2
Sources: Federal Statistical Office (up to Q3 2024), Federal Employment Agency, Eurostat . Annual figures for 2024 to 2027 are Bundesbank forecasts. 1 Private non-residential fixed capital formation. 2 As a percentage of nominal GDP . 3 In arithmetical terms, in percentage points. Discrepancies in the totals are due to rounding. 4 Domestic concept. 5 In millions of persons (Federal Employment Agency definition). 6 As a percentage of the civilian labour force. 7 Internationally standardised as per ILO definition, Eurostat differentiation. 8 Unadjusted figures, monthly basis. Pursuant to the Bundesbank’s negotiated wage index. 9 Ratio of domestic compensation per employee to real GDP per employed person. 10 Harmonised Index of Consumer Prices (HICP ), unadjusted figures.

List of references

Bernard, S., L. de Greef, I. Hurst, A. Kaya, I. Liadze and B. Naisbitt (2024), The effects of higher US

tariffs, NiGEM Topical Feature, National Institute Global Economic Outlook, Autumn 2024, pp. 48‑62.

Carrière-Swallow, Y., M. Firat, D. Furceri and D. Jimenez (2024), State-Dependent Exchange Rate Pass-Through, Oxford Bulletin of Economics and Statistics.

Cavallo A., F. Lippi and K. Miyahara (2024), Large shocks travel fast, American Economic Review: Insights, Vol. 6, No 4, pp. 558‑574.

CESifo

(2024):

Who’s afraid of Trump in the White House? How German firms view the

election

, Econpol Policy Brief, 65/2024, October, Vol. 8.

Committee for a Responsible Federal Budget (2024), The Fiscal Impact of the Harris and Trump Campaign Plans, US

Budget Watch 2024, 28 October 2024.

Deutsche Bundesbank (2024a), Forecast for Germany: German economy slowly regaining its footing ‒ outlook up to 2026, Monthly Report, June 2024.

Deutsche Bundesbank (2024b), Monthly Report, November 2024.

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

Deutsche Bundesbank (2024d), Wage developments in Germany: current situation, comparison with the euro area, and outlook, Monthly Report, October 2024.

Deutsche Bundesbank (2024e), Risks facing Germany as a result of its economic ties with China, Monthly Report, January 2024, pp. 11‑29.

Deutsche Bundesbank (2024f), Energy efficiency improvements: implications for carbon emissions and economic output in Germany, Monthly Report, April 2024.

Deutsche Bundesbank (2024g), The impact of seasonal temperature anomalies on global food commodity prices, Monthly Report, August 2024, pp. 17 ff.

Deutsche Bundesbank (2023a), The impact of digitalisation on labour productivity growth, Monthly Report, March 2023, pp. 43‑65.

Deutsche Bundesbank (2023b), Germany as a business location: selected aspects of current dependencies and medium-term challenges, Monthly Report, September 2023, pp. 15‑35.

Deutsche Bundesbank (2023c), Arduous recovery amid high and only gradually easing inflation – outlook for the German economy up to 2025, Monthly Report, June 2023, pp. 13‑37.

Deutsche Bundesbank (2022a), Impact of permanently higher energy costs on German potential output, Monthly Report, December 2022, pp. 29‑30.

Deutsche Bundesbank (2022b), Potential macroeconomic consequences of the war in Ukraine – simulations based on a severe risk scenario, Monthly Report, April 2022, pp. 13‑29.

Deutsche Bundesbank (2020), The impact of trade policy uncertainty, Monthly Report, January 2020, pp. 57‑60.

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.

Deutsche Bundesbank (2017), Demographic change, immigration and the potential output of the German economy, Monthly Report, April 2017, pp. 35‑47.

Dullien, S., S. Stephan and T. Theobald (2024), US

Wahlen: Trumps Zollpläne würden auch deutsche Wirtschaft empfindlich treffen,

IMK

Kommentar No 12, October 2024.

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

Felbermayr, G., J. Hinz and R. J. Langhammer (2024), US

Trade Policy After 2024: What is At Stake for Europe?, Kiel Institute for the World Economy, Kiel Policy Brief No 178, October 2024.

Goldman Sachs (2024a), Implications of Higher Tariffs for Euro Area and US

Monetary Policy, presentation by J. Hatzius,

ECB

Forum on Central Banking, Sintra, July 2024.

Goldman Sachs (2024b), Euro Area Outlook 2025: Under Pressure, European Economics Analyst, November 2024.

Haertel, T., B. Hamburg and V. Kusin (2022), The macroeconometric model of the Bundesbank revisited, Deutsche Bundesbank Technical Paper, No 01/2022.

Hantzsche, A., M. Lopresto and G. Young (2018), Using NiGEM in Uncertain Times: Introduction and Overview of NiGEM, National Institute Economic Review, Vol. 244 (1), pp. R1–R14.

ifo

Institute (2024), Der Investitionsstandort Deutschland aus Unternehmenssicht,

ifo

Schnelldienst, 2024, 77, No 03, pp. 52‑58.

International Monetary Fund (2024), Risk Assessment Surrounding the World Economic Outlook’s Baseline Projections, World Economic Outlook: Policy Pivot, Rising Threats, October 2024, pp. 24‑27.

McKibbin, W., M. Hogan and M. Noland (2024), The International Economic Implications of a Second Trump Presidency, Peterson Institute for International Economics, Working Paper 24‑20, September 2024.

Obst, T., J. Matthes and S. Sultan (2024), What if Trump is re-elected?, German Economic Institute, IW

Report 14/2024, March 2024.

Ortega, E., and C. Osbat (2020), Exchange rate pass-through in the euro area and EU

countries,

ECB

Occasional Paper Series, No 241.

Schnorrenberger, R., Schwind, P. and E. Wieland (2024), Forecasting HICP

package holidays with forward-looking booking data, Deutsche Bundesbank Technical Paper 04/2024.

Zandi, M., B. Lacerda and J. Begley (2024), Assessing the Macroeconomic Consequences of Harris vs. Trump, Moody’s Analytics Analysis, August 2024.

Footnotes

Seasonal adjustment here and in the remainder of this text also includes adjustment for calendar variations, provided they can be verified and quantified. In June’s Forecast for Germany, cumulative GDP
growth of 0.5 % was expected for the second and third quarters of 2024 (see Deutsche Bundesbank (2024a)). In actual fact, GDP
contracted by 0.3 % in the second quarter and rose by only 0.1 % in the third quarter.
See Deutsche Bundesbank (2022a).
This applies in particular to the motor vehicle industry; for more information, see Deutsche Bundesbank (2024b), Recent developments in Germany’s automotive industry, supplementary information in The German economy.
See Deutsche Bundesbank (2017).
According to ifo
Institute (CESifo
2024), strict regulation and excessive bureaucracy are the main factors dampening investment by German enterprises.
See Deutsche Bundesbank (2024c).
See Deutsche Bundesbank (2024b).
The Bundesbank finalised this Forecast for Germany on 27 November 2024. It was incorporated into the projections for the euro area published by the European Central Bank (ECB
) on 12 December 2024.
See the supplementary information entitled Underlying conditions for the Forecast for Germany.
By comparison, it is estimated that potential growth averaged 1.4 % per year in the period from 2011 to 2019.
The rates for 2025 and 2026 were revised downwards by 0.1 and 0.2 percentage point respectively.
See Deutsche Bundesbank (2023a).
See Deutsche Bundesbank (2023b).
This is reflected in lower than previously estimated contributions from trend TFP
and capital input. By contrast, the estimate of potential growth in the period from 2020 to 2024 was already conservative and was revised only marginally in this Forecast.
Over the past few years, though, temporary supply constraints also played a role; see, for example, the box in Deutsche Bundesbank (2023c), pp. 15 f.
Additionally, the data only began to look like this after a certain delay. In particular, the months from June 2024 onwards were revised downwards when the Federal Statistical Office published the employment figures on 30 October 2024. Besides the lower level of employment, this chiefly painted employment growth more negatively than before. See Deutsche Bundesbank (2024b), Chapter 3 “Labour market cooled in the third quarter”.
Only the manufacturing sector is making slightly greater use of short-time working arrangements. This instrument serves to bridge short-term demand shortfalls and is less suitable for many firms in the current situation.
The decline due to the persistent trend towards part-time work and a still high level of sick leave is also playing a role.
In particular, this refers to demand for healthcare and nursing staff, childcare staff, engineers and IT
specialists, as well as skilled staff for qualified business services.
Data that became available after the Forecast was finalised were somewhat better than expected. However, they confirmed the underlying trends in the Forecast, showing a further (albeit only marginal) uptick in unemployment in November and slightly (and primarily in the manufacturing sector) declining employment in October.
In the year to date, immigration has been somewhat lower than expected in the June Forecast. According to the Federal Statistical Office’s migration statistics, a net figure of 272,000 people moved to Germany up to August, around one-third less than in the same period of the previous year. For 2024 as a whole, a net figure of 480,000 persons is expected, which will decline further in the subsequent years (2025: 400,000 persons, from 2026: 300,000 persons per year).
See Deutsche Bundesbank (2024b), Chapter 3 “Labour market cooled in the third quarter”.
See Deutsche Bundesbank (2024b), Chapter 4 “Wages currently still rising strongly”.
Ongoing labour market shortages are evident in some of the better-performing services sectors. The negotiating parties in those sectors will therefore probably tend to agree on higher wage increases. See Deutsche Bundesbank (2024d). All past pay agreements included in the Bundesbank’s negotiated wage statistics (around 550 collective wage agreements and provisions governing civil servant pay) are factored into the forecasts of negotiated wage increases. They are extrapolated beyond their contractual terms, taking into account the overall economic situation and industry-specific factors.
See the supplementary information on the underlying conditions for this Forecast. See also Chapter 2 “Outlook for public finances”.
See Deutsche Bundesbank (2019a).
The price for the “Deutschland-Ticket” is set to go up from €49 to €58 in January 2025. Furthermore, the Association of Private Health Insurance Funds (Verband der privaten Krankenversicherungen – PKV) predicts exceptionally strong increases in contributions at the turn of the year. Taken together, alone the announcement of these two price increases, adjusted for the price increase generally expected in these areas, is likely to lead to a rise of + ¼ percentage point in the core rate in all months of 2025 (headline inflation: around + 0.2 percentage point).
In the package holidays subcomponent of the HICP
, prices are recorded according to their travel date, not the booking date; see Schnorrenberger, Schwind and Wieland (2024).
See Deutsche Bundesbank (2019b).
It is assumed that the price will thus fall from €65 to €59 per tonne of CO₂ For 2027, this corresponds to the price ceiling of €45 for 2020 prices as set out in the EU
ETS2
system.
In March of this year, the Federal Fiscal Court ruled that foreign investment funds that invested in German enterprises had been unlawfully subject to capital gains tax in the past. The national accounts record the sum of expected repayments, at just under ¼ % of GDP
in 2024, as capital transfers.
Survey results likewise point to major burdens in such a scenario. According to a special survey among manufacturing firms conducted before the US
election by ifo
Institute, 44 % of German industrial firms expected a negative impact on their business as a result of Donald Trump’s election; 5 % expected a positive impact, and 51 % expected it to make no difference who won the election; see CESifo
(2024).
If the planned carbon price path remains unchanged and the energy efficiency gains over the past 30 years are extrapolated, the Bundesbank’s model simulations from April 2024 conclude that emissions reductions will not meet the targets; see Deutsche Bundesbank (2024f).
For example, if productivity were to be more positively affected by digitalisation than expected – say, through the use of artificial intelligence. Capital input could also turn out to be greater, e.g. due to higher investment in green technologies as part of the transition to a net-zero economy.

Forecast for Germany: Significantly gloomier growth outlook – inflation decreases to 2% Monthly Report – December 2024

1 Macroeconomic outlook

1.1 The German economy is emerging only slowly from stagnation

Underlying conditions for the Forecast for Germany

External environment

Commodity prices

Interest rates and exchange rates

Fiscal policy

Details on the forecast of expenditure components

1.2 Temporary marked weakening of labour market

1.3 Much weaker wage growth in future after another strong year in 2024

1.4 The inflation rate is still elevated in 2025, but then gradually returns to 2 %.

2 Outlook for public finances

3 Risk assessment

The possible impact on the German economy of measures announced by the incoming US
administration

List of references

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Cite

Forecast for Germany: Significantly gloomier growth outlook – inflation decreases to 2% Monthly Report – December 2024

1 Macroeconomic outlook

1.1 The German economy is emerging only slowly from stagnation

Underlying conditions for the Forecast for Germany

External environment

Commodity prices

Interest rates and exchange rates

Fiscal policy

Details on the forecast of expenditure components

1.2 Temporary marked weakening of labour market

1.3 Much weaker wage growth in future after another strong year in 2024

1.4 The inflation rate is still elevated in 2025, but then gradually returns to 2 %.

2 Outlook for public finances

3 Risk assessment

The possible impact on the German economy of measures announced by the incoming US US : United States administration

List of references

1.4 The inflation rate is still elevated in 2025, but then gradually returns to 2 %.

The possible impact on the German economy of measures announced by the incoming US
administration