The global economy expanded moderately again in the final quarter of 2024. This expansion varied across regions. Economic activity remained buoyant in the United States, and in China it strengthened somewhat due to government stimulus measures and strong exports. By contrast, economic output in the euro area rose only slightly. This was also due to the elimination of one-off effects that had supported growth in the third quarter, such as the Olympic Games in Paris. 

The regional dichotomy in industrial activity also continued in the fourth quarter. Globally, industrial output is likely to have expanded quite substantially in the final quarter of 2024. However, output growth continued to be driven primarily by emerging market economies. In the advanced economies, industrial activity remained weak. Exports of goods also only picked up in the group of emerging market economies. Expectations of higher US import tariffs probably contributed here. 

The tighter US trade policy stance could weigh heavily on world trade and global activity. Newly elected US President Trump intensified his tariff threats against Canada and Mexico, the United States’ main trading partners. US import tariffs on China have already been raised, although so far not nearly by as much as was promised before the presidential election. Recently, the US administration has also adopted additional tariffs on all imports of steel and aluminium and announced broad-based tariff increases against many of its trade partners. Actions of this kind could provoke retaliatory measures from affected countries. Should that occur, the United States has announced that it will respond with further tariff steps. This could lead to serious trade conflicts. Against this backdrop, trade policy uncertainty rose considerably worldwide. The heightened uncertainty alone could already be dampening global economic activity. 

Energy commodity prices temporarily picked up markedly. Continued production cuts by OPEC and its partners, as well as new US sanctions against the Russian oil sector, pushed up oil prices at the beginning of 2025. Since then, however, oil prices have again declined markedly. The new US administration’s appeals to expand oil production in the United States and in OPEC countries probably played a major role here. At the same time, emerging trade policy conflicts are likely to worsen prospects for global oil demand. Against this backdrop, the International Energy Agency currently expects global oil markets to be well supplied in 2025. 

The disinflation process has made little progress recently. In the group of advanced economies, the increase in consumer prices rose to 2.9 % within one year in January 2025, compared with 2.4 % in October 2024. This was mainly due to base effects and the recent rise in energy prices. The core rate excluding energy and food remained stable at 3.1 % over the same period. Inflationary pressure remained stubbornly high, particularly in the services sector.

Financial markets were shaped by considerably higher long-term interest rates, an advancing disinflation process in the euro area and dwindling expectations of key interest rate cuts, especially in the United States. Market participants revised their expectations regarding key interest rates in the euro area for 2025 slightly upwards. However, they continue to expect money market rates to fall noticeably and the degree of monetary policy restriction to ease as the year goes on. Surveys as well as market data point to the inflation target being reached in the medium term. Expectations of interest rate cuts in connection with US monetary policy fell much more sharply. The disinflation process has turned out to be comparatively slow in this instance. More recently, market participants were expecting the Fed to make only one further interest rate cut in 2025. 

Yields on ten-year US Treasuries – and thus yields worldwide – rose sharply on balance. Factors contributing to this included growing expectations of inflation in the United States, unexpectedly robust growth signals from the US economy, and expected fiscal pressures. Concerns as to whether tariffs or the more restrictive immigration policy could hamper US growth have thus far receded. Investors also expect, at least in the short term, growth stimuli from US fiscal policy, which is likely to result in a sharp increase in its debt levels in relation to GDP. The rise was ultimately caused by an unusually high increase in term premia. This not only reflected the gradually growing optimism regarding the US economy, but also renewed uncertainty surrounding inflation developments in the United States and the future path of key interest rates. The rise in term premia also spread to the yields of ten-year federal bonds (Bunds) and European government bonds overall. However, given that expectations regarding monetary policy interest rates were revised upwards more significantly for the United States than for the euro area, the interest rate differential between the euro area and the United States widened noticeably. This was the decisive factor in the euro depreciating significantly against the US dollar. Overall, the euro was also effectively down on the currencies of 18 trading partners in the reporting period, with this likely being more a reflection of a subdued economic picture.

With investors’ appetite for risk increasing and the US economy posting unexpectedly positive figures, prices in the international equity markets rose noticeably. On balance, the increased risk appetite helped drive up valuations, in particular for US equities. Particularly in anticipation of the new US administration’s relaxation of regulations for the financial industry, investors expected banks’ high interest margins to persist for some time. The value of bank equities rose significantly as a result.

At its monetary policy meetings in December 2024 and January 2025, the ECB Governing Council adopted two further interest rate cuts. The deposit facility rate – the rate though which the Governing Council steers the monetary policy stance – was lowered by 25 basis points twice, reaching 2.75 %. One of the Governing Council’s rationales for the policy rate cuts was that the disinflation process was well on track. Inflation has largely continued to develop broadly in line with the December projections. The ECB Governing Council expects euro area inflation to return to the 2 % medium-term target in the course of this year. 

In December, the ECB Governing Council adjusted its communication, removing earlier references to restrictive monetary policy. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. The Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.

The rebound in monetary growth continued in the fourth quarter of 2024; lending is increasingly showing signs of recovery. Inflows into the broad monetary aggregate M3 stabilised at a high level in the last quarter of 2024; the annual growth rate of M3 rose to 3.5 % at the end of December 2024. Growth in the money supply was bolstered in particular by a further decline in the opportunity costs of holding money and by economic uncertainties which boosted the appeal of liquid assets. On the counterpart side, banks’ lending to domestic non-banks replaced inflows from abroad as the main factor driving monetary growth, with the upward trend in loans to households gaining in strength. Furthermore, loans to non-financial corporations showed some signs of recovery as well, though probably only a gradual one given the subdued growth prospects for the euro area. Banks surveyed in the Bank Lending Survey (BLS) reported a marginal uptick in demand for loans to enterprises in the fourth quarter of 2024. 

German economic output fell surprisingly significantly in the fourth quarter of 2024. According to the flash estimate of the Federal Statistical Office, seasonally adjusted real gross domestic product (GDP) recorded a quarter-on-quarter decline of 0.2 %. This represents a slight downward revision to an initial estimate published previously. The Federal Statistical Office cited significantly lower exports as a major drag on the economy, while private and government consumption expenditure rose. Private consumption benefited from substantially higher wages. The labour market outlook deteriorated, however. This contributed to the high level of uncertainty among consumers and thus dampened private consumption. Industrial output continued to decline, while construction probably stagnated. The still elevated financing costs, high economic policy uncertainty and the now very low capacity utilisation continued to weigh on investment and thus domestic demand for capital goods and construction work. In view of the deteriorated competitive position, German industry was unable to benefit from the growing foreign sales markets. 

Consistent with this, German banks’ lending business with enterprises remained anaemic in the final quarter of 2024, too. Subdued demand for loans to enterprises reflects the difficult economic environment and uncertain economic outlook. This is consistent with the fact that, according to the BLS, banks tightened their credit standards on balance in the fourth quarter of 2024. The banks attributed this tightening to their lower risk tolerance and the increased credit risk. Banks’ lending business with households, on the other hand, continued its slight recovery observed since the summer. This was mainly due to the continued increase in demand for loans for house purchase, which benefited from falling lending rates and brisk demand for housing. Moreover, according to the BLS, households’ greater optimism regarding housing market prospects – including the expected house price developments and expected yields – also contributed to demand. 

Employment remained more stable in the fourth quarter than had been expected following the decline in the third quarter. Overall employment remained at the level of the previous quarter. Hiring in some services sectors continued to offset the decline in employment in the manufacturing sector. Short-time work has risen noticeably since the summer holidays. Here, too, industrial jobs are most affected. Unemployment rose moderately, and the outlook remains subdued. 

Growth in negotiated wages was strong in the fourth quarter, albeit somewhat weaker than in the third quarter. Including additional benefits, they were up by a substantial 5.8 % on the year in the fourth quarter of 2024, compared with 8.9 % in the previous quarter. A different picture emerges when special payments such as inflation compensation bonuses are stripped out of negotiated wages and only basic rates of remuneration are considered. In this configuration, negotiated wages rose by 6.6 % on the year in the fourth quarter, a distinctly stronger increase than in the third quarter (5.7 %). Negotiated wages overall once again rose more sharply in services than in manufacturing. In many services sectors, it is easier to attain higher wages than in industry and construction given the better economic situation. Actual earnings probably grew a little less strongly in the fourth than in the third quarter.

In recent times, there have been hardly any new agreements for larger sectors. Given the prolonged period of economic weakness and significantly lower inflation rates, the forthcoming wage negotiations will probably result in distinctly lower agreements than in the past two years. 

Consumer prices (as measured by the Harmonised Index of Consumer Prices, or HICP) rose again moderately in the fourth quarter. On average across the months of October to December 2024, consumer prices increased by a seasonally adjusted 0.5 %, compared with 0.4 % in the previous quarter. Falling energy prices continued to have a dampening effect. By contrast, food price inflation picked up again markedly. Services prices continued to rise significantly, but less sharply than in previous quarters. In the case of non-energy industrial goods, however, price inflation saw a distinct uptick again. Annual headline inflation rose by 0.3 percentage point to 2.5 % in the fourth quarter. Core inflation (HICP excluding energy and food) edged up slightly to 3.3 %.

Averaged over 2024, the inflation rate fell significantly to 2.5 %. In 2023, it had come in at 6.0 %. In particular, the upward pressure on goods prices subsided substantially. At 2.8 %, the rate of inflation for food was close to the historical average in 2024. Inflation for non-energy industrial goods fell to 1.4 % and likewise approached the historical average. Energy actually made a significantly negative contribution to the HICP rate. Only services inflation remained unusually high, at 4.3 %, and declined only a little compared with 2023. The large wage increases had a particularly strong impact here.

Inflation held steady at 2.8 % in January 2025. In month-on-month terms, too, consumer price inflation continued at the same pace as in December. Energy prices increased especially strongly. This was due to both the increase in the national carbon price as of the beginning of the year and higher crude oil prices. The depreciation of the euro against the US dollar further amplified the price-driving effect of the higher crude oil prices. This contrasted with a steep decline in food prices. The prices of non-energy industrial goods decreased marginally. Services became markedly more expensive again recently. The price increase for the “Deutschlandticket” and higher costs in the health sector had an impact here. Annual core inflation rose somewhat, from 3.3 % in December to 3.6 % in January.

The inflation rate is likely to come down over the next few months, before going back up temporarily from the middle of the year. Services are the main driver of the expected disinflation process. This is partly because of lower wage increases. Nevertheless, services inflation should remain significantly above average. By contrast, the contribution of energy is likely to pick up again over the course of the year, due, in part, to base effects. Food prices are expected to go up significantly due to price developments at upstream stages and after-effects from the exceptionally large wage increases in the retail sector. Prices of non-energy industrial goods will rise moderately from today’s perspective. On balance, the disinflation process is therefore likely to continue for the core inflation rate.

Despite the persistently weak underlying cyclical trend, economic output could pick up slightly in the first quarter. Industry could be less of a drag than before in the first quarter and construction could remain at roughly the level of the previous quarter. Factors such as high uncertainty, increased financing costs and low capacity utilisation are still weighing on investment. However, demand (as measured by order intake) has recently recovered somewhat in both sectors. Housing construction benefited from the decline in interest rates for building finance up to the end of 2024. Even so, surveys conducted by the ifo Institute on the shortage of orders and equipment utilisation did not indicate any improvement in January. By contrast, private consumption could expand again somewhat: the sharply higher wages offer further scope for additional consumer spending. At the same time, the labour market will probably continue to cool, with moderately declining employment and a slight rise in unemployment, and consumer sentiment remains gloomy. Consumers will therefore probably make only hesitant use of this additional scope for spending. Exports have recently been a particular dampener on economic activity. They may develop somewhat less unfavourably in the first few months of the current year. That would be the case, in particular, if they were to benefit from anticipatory effects in the face of looming US tariffs. All in all, economic output could see marginal growth in the first quarter. The German economy essentially remains trapped in stagnation. 

The general government deficit ratio remained at 2½ % last year, and there are no signs of any major change for 2025, either. Although last year there were no significant temporary burdens from the energy price brakes, in contrast to the previous year, some expenditure increased steeply (mainly on social security funds, but also on interest, personnel, the promotion of climate-friendly electricity production under the Renewable Energy Sources Act and the Federal Armed Forces). On balance, the structural deficit ratio rose significantly to around 2 %. This year, expenditure-side price pressures are likely to ease, and climate-related spending could grow roughly in line with GDP. Although expenditure on health, long-term care and pension insurance will probably continue to grow significantly, this will be offset by more extensive additional revenue overall generated by higher contribution rates. Defence spending reached the NATO agreement level of 2 % of GDP in 2024, and considerably higher levels and consequently expanded scope for borrowing are now under discussion. However, there are still no plans for another significant surge in spending this year.

The central government deficits also remain relatively high despite compliance with the debt brake in 2024 and interim budget management since the beginning of the year. The central government’s financial statistics deficit, including off-budget entities, fell significantly in 2024 to around €50 billion (2023: around €90 billion). However, this was also due to one-off factors, such as central government receiving more funds from NGEU and higher repayments of crisis assistance funds that it had granted in previous years. Net borrowing fell short of the debt brake limit, and central government was still able to avoid tapping its reserves. This gave it additional leeway of €10 billion for the current year. Although there is no budget plan for 2025, this does not demand a restrictive spending stance. Tighter limits will ultimately apply only to new projects. Overall, it is important to keep the rules of the debt brake in mind. The Federal Minister of Finance reported the need to consolidate €16 billion in order to comply with the borrowing limit in the 2025 budget plan, which will be passed at a later date.   

Policymakers face the challenge of addressing structural weaknesses while safeguarding sound public finances in Germany. Action is required in the area of public infrastructure and the sustainable financing of defence spending, for instance. The tax burden and expenditure ratios are already relatively high, and demographic developments will put an additional strain on public finances. Given such conflicting aims, binding fiscal rules like the debt brake play a crucial role in safeguarding sound public finances. In principle, given a low government debt ratio, adjusting the requirements of the debt brake in line with changing conditions seems justifiable. That said, higher upper limits must still be reliably binding and conducive to sound public finances. And even then, it remains essential to review priorities and use financial resources more effectively to better gear fiscal policy to the challenges. 

Initial experience with the new European fiscal rules has been gained in recent months. For 22 of the 27 Member States, fiscal plans have now been agreed under the new rules. These plans set multi-year expenditure ceilings for expenditure growth to keep the debt and deficit ratios of each Member State within the agreed bounds. For some countries, the ceilings are higher than those originally proposed by the European Commission. For the highly indebted countries of France, Belgium and Italy, debt ratios will initially continue to rise as planned. By contrast, Portugal, Greece and Spain are set to see their debt ratios fall significantly. Five of the 22 countries extended the duration of their fiscal plan from four to seven years, thereby reducing the pressure to adjust. Germany is one of the five countries without a fiscal plan: the new Federal Government will have to submit a plan straight away.

Looking forward, it will be a matter of ensuring that the rules are implemented rigorously and that government finances remain on a sound footing. In this context, it is notable that, in some cases, the Council granted extensive correction deadlines to countries subject to an excessive deficit procedure. Procedures were not initiated for certain countries despite the possibility that they could significantly fall short of the relevant requirements. Moreover, current estimates already point to rather less favourable developments in some cases. In the case of highly indebted countries, in particular, it would be crucial to make appropriate adjustments as soon as necessary.