Germany's economy is grappling with both cyclical and structural challenges as it approaches 2025. The OECD recently revised Germany's 2025 economic growth forecast down to 0.4%, while the ifo Institute also lowered its GDP growth projection to 0.2% for the year. The ifo Institute highlights bureaucratic hurdles and energy transition issues as significant structural challenges, compounded by unclear global demand recovery signals, which are exacerbating the decline in Germany's industrial sector.
The ifo Institute's survey indicates widespread concern across German industries about insufficient orders in 2024. Despite a slight recovery in purchasing power and lower interest rates, domestic demand remains suppressed due to economic policy uncertainties and geopolitical tensions. The residential construction sector is particularly affected, with a 5% decline in investment last year, marking the fourth consecutive year of contraction.
Private consumption has also stagnated, with most income growth turning into savings rather than spending. Although household disposable income grew by 1.3%, inflation-adjusted consumption spending only increased by 0.3%, while the savings rate rose to 11.4%. This trend is linked to low consumer confidence, as reflected in the GfK consumer climate index, which has shown persistent pessimism since mid-2024.
Business confidence has not improved either. Investment fell by 2.8% in 2024, and manufacturing did not benefit from global economic growth, as German exports shrank by 1.7% despite a 2.7% rise in the global economy. The ifo Institute attributes this to a decline in Germany's industrial competitiveness, with manufacturing undergoing a deep transformation from product manufacturing to product development and distribution.
Energy costs, complex EU regulations, and potential tariffs from the U.S. are long-term challenges that require policy and regulatory reforms. Domestic and international demand weakness, combined with structural issues, intensifies downward pressure on the economy. Energy prices, driven by supply, demand, and geopolitical factors, continue to impact high-energy industries like chemicals, which still rely heavily on natural gas and oil.
Despite these economic challenges, the German stock market has performed well, with the DAX index rising by 15.63% this year. Major companies like SAP, Rheinmetall, Siemens, and Deutsche Telekom have significantly contributed to this growth. SAP, in particular, has benefited from increased demand for AI and cloud solutions, while defense companies have gained from higher European defense spending.
