German economy set for long recession, top think tank warns

The German economy will contract more than expected this year as sticky inflation takes its toll, a top economic think-tank has warned.

Germany has been branded the ‘problem child’ of the eurozone economy as confidence among investors ebbs away.

Gross domestic product is expected to fall by 0.4 per cent this year, more than the 0.1 per cent forecast by the Ifo Institute in March.

The Ifo Institute’s head of economic forecasts, Timo Wollmershaeuser, said: ‘The German economy is only very slowly working its way out of the recession.’

The economic institute has also cut the forecasts for Germany in 2024 to 1.5 per cent GDP growth, down from the 1.7 per cent it had expected.

Last month data from the Federal Statistical Office showed Europe’s largest economy contracted by 0.3 per cent in the first quarter of 2023, compared with the previous three months, when it shrank by 0.5 per cent.

The technical definition of a recession is two consecutive quarters of contraction.

The statistics office said that while private sector investment and construction grew at the start of the year, this was offset in part by a drop-off in consumer spending as higher prices forced households to rein in spending. 

The war in Ukraine has also unsettled both businesses and consumers.

The most pressing issue for Germany is getting its energy transition on track. 

Affordable power is a key precondition for industrial competitiveness, and even before the end of Russian gas supplies, Germany had some of the highest electricity costs in Europe.