The German Economy Has Been Stagnating for Five Years. When Can We Expect a Recovery?

Following a repeated decline in economic activity at the turn of last year into this year, the recovery of the German economy could begin in the second half of the year, thanks to the expected reduction in interest rates and a progressive decline in energy prices, states the Croatian Employers’ Association in this week’s analysis.

Moreover, a recovery in the manufacturing industry is on the horizon globally, and indicators of activity in the sector have recently signaled growth after nearly one and a half years of contraction. Thanks to a strong drop in energy prices in the coming months, at the very least, stabilization is expected in energy-intensive sectors of production after a contraction of nearly 20 percent in the mentioned activities over the last two years. It is possible that parts of production (intermediate goods) could once again become profitable.

This positive effect on the economy, however, is not in any way contrary to the assessment that high energy prices are one of the fundamental weaknesses of Germany as a business destination. It is worth noting that energy prices in Germany are about 10 percent higher than the European Union average, double those before the Russian aggression against Ukraine, and even 3.5 times higher than in the USA. This will certainly be one of the important factors in making global investment decisions, impacting medium-term and long-term trends in production, while the drop in energy prices will be decisive in the short term.

The growth of real wages, buoyed by generous collective agreements, gives a boost to personal consumption, where movements in the last two years have fallen short of expectations. For the second half of the year, and especially in 2025, there is hope that the German economy will emerge from the stagnation that has lasted for five years. The main impetus for this hope is the easing of the dampening effect of monetary policy over the last two years, which suggests that a turnaround is occurring in the global production cycle. This certainly goes hand in hand with the drop in energy prices and the positive effect of rising real wages on reducing uncertainty and personal consumption.

The upcoming recovery is likely to be very moderate, and unlike previous cycles, it is unlikely to be supported by significant easing of monetary policy. Despite expectations that the ECB will start cutting rates in June this year, this process is likely to be very slow and cautious given the persistently high inflation, so the reduction in interest rates will likely be halted as early as spring 2025 at a deposit rate of 3.0 percent, or just 100 basis points lower than now.

Additionally, there are the aforementioned structural problems, which will not prevent recovery but will limit it. In 2025, the Croatian Employers’ Association expects German GDP to grow by only 0.5 percent after two consecutive years of decline of 0.3 percent.