After stagnation this year, Germany’s economy will grow less than one percent next year. This emerges from the World Economic Outlook published by the International Monetary Fund (IMF) on Tuesday. At zero percent this year and 0.8 percent, Germany is performing worse than the major industrialized countries in Europe and North America. The IMF thus revised the Germany figures downwards again compared to the spring forecast. The annual meeting of the IMF and World Bank began in Washington on Monday and is dominated by geopolitical tensions.
Germany’s economic downturn comes at a time in which, according to the IMF, the global economy is proving to be surprisingly robust in view of the consequences of pandemics, wars and extreme weather conditions in some regions. “It looks as if the global battle against inflation has been won,” writes IMF chief economist Pierre-Olivier Gourinchas. In most countries, inflation is leveling off at the central banks’ inflation target, which is 2 percent in an increasing number of countries.
The global economy is growing by 3.2 percent this year and next year. In the industrialized nations, the fight against inflation did not come at the price of higher unemployment, unlike in earlier phases. Among industrialized countries, the United States is particularly strong, with a growth rate of 2.8 percent this year and 2.2 percent next year. The Eurozone will grow by 0.8 percent this year and by 1.2 percent next year.
Shift to the service economy
In addition to Germany, Italy is doing poorly (0.7 percent growth), while Spain is doing comparatively well with an increase of 2.9 (2024) and 2.2 percent (2025). Spain benefits from tourism and thus from a globally registered general turn towards services, while Germany and Italy suffer from falling demand for industrial goods and also have to cope with losses in competitiveness compared to China and India.
According to an IMF analysis, the government’s austerity measures are also having a negative impact on Germany. Fiscal consolidation is a burden. The fund also registers a clear gap in productivity between the USA and the EU. In America, labor costs per unit produced have been kept stable because increases in productivity have offset rising wages. In Europe, however, wage increases exceed productivity gains, with the result that unit costs (the manufacturing costs per unit) rise.
China’s role has changed dramatically
The IMF is looking ahead to another development that has a major impact on Germany as an industrial location: the rise of China as a leading manufacturer of electric cars. As a result of technical breakthroughs in batteries and accompanying policies in many countries, the transition from conventional cars to electric cars accelerated. According to the IMF, this upheaval is leading to a “redistribution of comparative cost advantages”: China’s role in production and exports in particular has increased dramatically over the last 15 years.
However, IMF authors come to the conclusion that the transition to electric cars in the EU, combined with China’s growing role as a supplier, will have only a minor impact on gross domestic product by 2035. As a result, it is shrinking by 0.3 percent and employment in the sector is falling. While European manufacturers are losing market share and jobs, countries with low car production are benefiting greatly from gains in purchasing power. That’s why some countries, especially in Eastern Europe, for example the Czech Republic, are hit harder, while other countries benefit. Germany is not specifically mentioned.
IMF advises consolidating budgets
The IMF sees growing risks for the global economy from increasing protectionism and geopolitical tensions. The conflict in the Middle East in particular could have an impact on raw material prices and thus put a strain on the economy. In order to prepare for difficult times, the IMF believes it is essential that countries use the phase of falling interest rates to consolidate their budgets. Many countries should introduce austerity programs, but refrain from making major cuts in a short period of time. The IMF advocates for a gradual reduction in budget deficits over several years.
The two largest economies, the USA and China, do not yet have an austerity plan that will slow down the debt dynamics, notes IMF economist Gourinchas. Delayed consolidation could trigger eruptions on the financial market, while abrupt cuts threaten to put a strain on the economy. The IMF considers structural reforms to be just as important in order to stimulate economic growth and productivity. This is the only way to prepare for the numerous challenges, including the aging and shrinking population in many countries, climate change and poverty.
