April 24, 2024
Economy

Germany to be worst performing rich economy for second year in a row


German Chancellor Olaf Scholz

German leader Olaf Scholz’s climate policies are creating uncertainty in the economy according to the country’s central bank – REUTERS/Liesa Johannssen

Germany will be the worst-performing rich economy in the world for the second year in a row as Olaf Scholz battles a property downturn and uncertainty over net zero targets.

Europe’s largest economy is forecast to grow by just 0.2pc this year, according to the Ifo Institute. This represents a major downgrade from previous predictions of a 0.7pc expansion.

Following last year’s contraction of 0.1pc, it means Germany is on track to be the worst performer in the G7 for a second consecutive year, based on forecasts by the International Monetary Fund (IMF).

Timo Wollmershäuser of the Ifo said: “Consumer restraint, high interest rates and price hikes, the government’s austerity measures, and the weak global economy are currently dampening the economy in Germany and leading to another winter recession.

“Economic output will accelerate toward the middle of the year as interest rate and price burdens gradually disappear and consumers’ purchasing power increases.”

Germany is struggling with slow growth in China, a major trading partner, which has experienced a muted rebound from the pandemic and is in the grip of a property crisis. Germany is battling its own housing downturn, as falling property prices force developers to cancel projects.

At the same time Germany relied heavily on cheap Russian energy, rendering the country vulnerable when Vladimir Putin invaded Ukraine and sought to wield gas supplies as a weapon against the West.

Last month, Germany’s central bank the Bundesbank warned that “uncertainty regarding climate and transformation policy remains elevated” in Germany.

Scholz’s government was plunged into crisis last year after a constitutional court blew a €60bn (£51bn) hole in its net zero budget, after ruling ministers could not repurpose unspent Covid emergency funds to fight climate change.

German inflation is set to fall from 5.9pc last year to 2.3pc this year, the Ifo predicted, dropping to 1.6pc in 2025 as the cost of living crisis comes to an end.

Christian Lindner, Berlin’s finance minister, acknowledged the country’s problems, in January describing Germany as “the tired man” of Europe.

“Germany is not the sick man,” he told the World Economic Forum in Davos.

“After a very successful period since 2012 and these years of crisis, Germany is a tired man, after a short night, and the low growth expectations are partly a wake up call. And now we have a good cup of coffee – which means structural reforms – then we will be continuing to succeed economically.”

The average employee in Germany took 19.4 sick days last year, while the average hours worked per employee are the lowest in the G7.

Germany was the only G7 economy to shrink last year. Despite falling into recession, the UK grew 0.1pc and Japan expanded by 1.9pc. The US led the way with growth of 2.5pc.

IMF forecasts put the UK as the second-worst performing in the G7, but with growth of 0.6pc, three times faster than Germany. Italy is next with predicted growth of 0.7pc, while the US again leads the pack with output set to grow by 2.1pc.

Growth of 0.2pc would also mean Germany will be outperformed by every major developing economy, the weakest of which is South Africa, which the IMF expects to grow by 1pc this year.

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