Scholz Advisers Slash German Growth Forecast for Next Year
(Bloomberg) -- Germany’s economy will hardly grow next year as underlying problems add to cyclical weakness, according to Chancellor Olaf Scholz’s independent panel of experts.
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Gross domestic product is set to increase by just 0.4% in 2025, the Council of Economic Experts predicted in a twice-yearly report published Wednesday in Berlin. While other forecasters have also scaled back earlier growth projections, that’s just a fraction of the 1.1% predicted by the government a month ago.
In May, the advisers still anticipated a pickup in growth to 0.9% next year after slight expansion in 2024. That latter prediction has been revised to foresee a contraction of 0.1%.
Surveys point to poor sentiment, particularly after the election of Donald Trump in the US and the collapse of Germany’s government. Bundesbank President Joachim Nagel warned earlier in the day that Trump’s threatened trade levies risk derailing the economy and could cost 1% of German economic output.
The country has already fallen behind internationally, mainly because of protracted weakness in manufacturing. The sector’s underperformance suggests that persisting factors such as high costs for energy and labor play an important role, the economic advisers said.
“The weakness of industry and the duration of the weak phase suggest that the German economy is being held back by structural problems as well as cyclical ones,” said Monika Schnitzer, who heads the panel of experts.
Households also remain hesitant to consume even after incomes rose to make up for inflation in recent years. That may be due to continued uncertainty over Germany’s economic fortunes and a pessimistic outlook, according to the report.
The advisers urged the government to durably increase public spending in infrastructure, defense and education, areas that where expenditure has lagged the international average for years.
That may require a rethink of the country’s constitutional spending limits, they said.
“The debt brake aims to prevent future generations from being burdened by excessive public debt. However, future generations can also be burdened by insufficient future-oriented spending and inadequate infrastructure maintenance,” said Achim Truger, another member of the Council of Economic Experts.
The topic was one reason why Germany’s three-party coalition fell apart last week, and is set to feature prominently in the campaign for elections on Feb. 23. Friedrich Merz, the conservative frontrunner to succeed Scholz as chancellor, signaled Wednesday that he’s open to reform — a departure from the traditional stance of the Christian Democrat-led bloc.
The experts recommended various measures to increase the room for spending, including an infrastructure fund, binding quotas for other areas and “moderate” changes to the debt brake.
But in a sign of how controversial the debate still is, Veronika Grimm, one of the five members of the council, dissented on the matter. Any tweaks to the rules should be coupled with structural reform that incentivize private investments, she wrote.
--With assistance from Mark Schroers.
(Updates with government’s October forecast in second paragraph)
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