The downward revision of our forecasts for the German economy is in line with the preliminary estimate of a 0.2% contraction in GDP in 2024. Activity in the first three quarters of 2024 was supported in particular by public consumption, despite limited budgetary resources. Household consumption, on the other hand, weighed on growth. Households switched to savings because of low consumer confidence in a context of mediocre economic performance, and because purchasing power gains were still too timid. The rise in investment in other products would not be enough to offset the collapse in construction investment and the fall in productive investment. Gross fixed capital formation is likely to continue to be penalised by the long lag in the pass-through of past interest rate rises and by the deterioration in Germany's industrial sector. Net exports are expected to continue to contract, due to a fall in exports and an increase in imports. Inflation continues to slow, albeit at a slower pace, averaging 2.5% in 2024.

Economic activity in 2025 would be underpinned by public consumption and, to a lesser extent, by a slight increase in household consumption. We forecast a very slight recovery in GDP to 0.2% in 2025. We expect activity to accelerate in the second half of 2025, taking GDP to 0.8% in 2026, slightly above the economy's potential, but clearly below the growth seen over the last decade. The disinflationary process would continue, with inflation averaging 2.1% in 2025 and stabilising at 2% in 2026.

The deterioration in the economic and financial situation of companies was limited, which helped to keep the unemployment rate at very low levels. Nevertheless, the manufacturing industry has been negatively affected by the new context of higher energy prices. Besides energy prices, there are other structural challenges linked to labour shortages and the transformation of production, leading to uncertainty about the medium-term economic outlook.