Kiel Institute's autumn forecast: German economy to shrink again in 2024, subsequent recovery weak

"Previous upward signals by early bird indicators have disappointed," says Stefan Kooths, head of forecasting at the Kiel Institute, commenting on the fall forecast published today. "While public and quasi-public services have been upward trending most private activities performed poorly. Overall and looking forward, the German economy is stuttering into an anemic recovery, partly because economic policy is unable to set a reliable course."

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For the current year, weak private consumption (+0.4 percent) is weighing on the outlook, as households are holding spending back despite rising real incomes. In addition, manufacturing (-2.7 percent) and construction (-4.3 percent) are drifting deeper into recessionary territory. Investment expenditure is suffering from pronounced economic policy uncertainty, causing fixed capital formation in machinery and equipment to fall by 7.2 percent.

2026: above average working days are supporting output numbers

In the following two years, the German economy will pick up speed again thanks to further increases in real income, higher demand from abroad and falling interest rates. By September 2025, the ECB should have lowered the key interest rate to 2.25 percent.

However, the recovery is expected to be sluggish, as the room for expansion is assessed lower after a downward revision of overall production capacities. However, this finding is subject to particular uncertainty due to the currently accelerated structural change.

In an initial estimate for 2026, the Kiel Institute expects gross domestic product (GDP) to increase by 1.1 percent, 0.3 percentage points of which are attributable to the above-average number of working days.

Given the weak economy, the unemployment rate is likely to rise to 6.0 percent (2024) and 6.1 percent (2025) and then fall slightly to 5.9 percent (2026).

The total employment peaks in the middle of the forecast period at around 46,200 people, after which the decline sets in following downward demographic trends.

Inflation will continue to fall and, after 2.2 percent this year, will probably be around 2 percent in the next two years. The core rate (excluding energy) will not reach the 2 percent mark until 2026 because the price pressure on services will continue for longer.

The budget deficit is likely to fall from 1.9 percent of GDP (2024) to 1.7 percent (2025 and 2026), mainly due to the slight increase in economic output.

According to the forecast, residential construction will not pick up until 2026 (+2.6 percent). The tentative recovery will then start from a level as low as it was 13 years ago.

Not just an economic crisis, but increasingly also a structural crisis

"The German economy is increasingly facing a crisis that is not only cyclical but also structural in nature," says Moritz Schularick, President of the Kiel Institute. "The budget cuts of the government coalition are an additional burden here and the ECB's interest rate turnaround is coming too late for Germany. What's more, old core industries have been resistant to change for far too long and the asylum debate is poisoning the dialog about the economic need to attract skilled workers from abroad. As long as this remains the case, we can watch our growth opportunities dwindle."

In its forecast for the global economy, the Kiel Institute predicts growth rates of a good 3 percent for this year and the next two years. India's economic output will grow particularly strongly, by around 7 percent.

This means that German exports (2025: +1.2 percent; 2026: +2.5 percent) will lag noticeably behind global momentum in the forecast period.