German GDP to contract 0.5% in 2024 due to budget crisis - IW

The IfW institute also predicted on Wednesday that expected consolidation measures as a result of the budget ruling would alone drag 2024 economic growth down by 0.3 percentage points. "There is just as much uncertainty about the exact form of the savings as there is about their economic impact," the researchers said.

Germany's economy will contract by 0.5% in 2024 because of uncertainty caused by a budget crisis, the German economic institute IW said on Wednesday.

A constitutional court ruling last month upset the government's financing plans, leading to weeks of negotiations over how the 2024 budget should look and causing much uncertainty, said researchers at the economic institute. "The German government has played a decisive role in this crisis," IW Director Michael Huether said. "The coalition must now demonstrate its ability to act in terms of fiscal policy."

The dispute over the federal budget is unsettling companies, with many postponing their investment decisions for the time being, the economic institute said. The IfW institute also predicted on Wednesday that expected consolidation measures as a result of the budget ruling would alone drag 2024 economic growth down by 0.3 percentage points.

"There is just as much uncertainty about the exact form of the savings as there is about their economic impact," the researchers said. The IfW now sees economic growth of 0.9% next year instead of the 1.3% it had predicted in September.

According to the IW calculations, government spending totalling more than 20 billion euros will be cut because of the court ruling, dragging GDP down 0.5%. In the worst-case scenario, a decline of one percentage point was possible, the economic institute said.

Following a 0.5% GDP decline expected this year, next year should have seen a recovery, IW said. The institute said that in the last 70 years, real gross domestic product fell for only two consecutive years, in 2002 and 2003. While the German economy shrinks, other large economies were expected to grow, with Italy posting 0.5% growth, France 0.8%, the U.S. 1.3% and the global economy 2.5%, it said. Even without the budget crisis, the IW said the German economic model based on exports was under pressure.

Global trade was expected to grow by 1% in 2024, following a 1.5% contraction in 2023, and it would also be a challenging year for the construction sector because of high interest rates, it said. Only the service sector would see a slight upturn, according to the IW.

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