New reports point to a slight turnaround in the German economy

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Timo Wollmershaeuser, head of the Ifo Institute, speaks during a press conference at the Federal Press Conference.  Fabian Sommer/dpa

Timo Wollmershaeuser, head of the Ifo Institute, speaks during a press conference at the Federal Press Conference. Fabian Sommer/dpa

The Bundesbank, Germany’s central bank, described growing optimism about the state of the country’s economy in its latest monthly report published Thursday.

The influential ifo institute, meanwhile, raised its forecast for German gross domestic product (GDP) growth for the current year from 0.2% to 0.4%, pointing to indications of a tepid recovery for Europe’s largest economy .

The Bundesbank said Germany’s inflation-adjusted GDP is likely to rise slightly again in the second quarter.

Although the German economy is still facing headwinds, there are increasing positive signals pointing to recovery, the bank’s experts wrote in the report.

In the first quarter, the economy surprised with a very modest growth of 0.2%, supported by exports and increased investments in the construction sector.

According to the Bundesbank, the industry is slowly emerging from its weak phase. Industrial production rose in April and demand from abroad in particular shows signs of improvement – ​​albeit from a low level.

Private consumption, which has helped the economy during a period of contraction, could rise slightly in the current quarter, the Bundesbank predicts.

Consumers were still reluctant to spend more at the start of the quarter. However, experts from the bank wrote that consumers’ spending capacity is currently improving noticeably, mainly thanks to a strong wage increase.

However, high interest rates continue to dampen investment, which has a particularly negative impact on residential construction, which fell significantly again in April after being boosted by unusually mild weather in Germany early this year.

Ifos improved growth forecasting

“The German economy is slowly emerging from the crisis,” ifo economic director Timo Wollmershäuser said in Berlin on Thursday.

He said it was not a summer fairy tale, but that “new hope is emerging.”

Next year, the ifo expects economic growth of 1.5%.

The institute says that the purchasing power of private households is increasing, while global trade and industrial production should continue to recover in the second half of the year.

The easing of monetary policy will also support investments, Wollmershäuser said. He said the institute expects the European Central Bank to cut interest rates twice more this year.

Interest rate cuts could “perhaps initiate a turnaround in the construction sector at the end of the year,” Wollmershäuser said.

“In general, the course is aimed at recovery,” said Wollmershäuser.

But the president of the ifo Institute, Clemens Fuest, said the lack of clear economic policies and the German government’s bureaucratic burdens remained a problem.

Fuest said the economy is “perking up a bit, but the structural issues remain unresolved.”

The institute now also predicts that inflation will decline further to 2.2% this year and 1.7% next year.

However, the number of unemployed people in Germany is expected to rise from 2.6 million to 2.7 million over the course of this year, giving an unemployment rate of 5.9%.

But next year the number of unemployed is expected to fall again to 2.6 million.

The number of workers is expected to rise slightly from 45.9 million to 46.1 million this year and to 46.2 million next year.

According to the ifo Institute, the German government’s budget deficit will fall significantly, from 99 billion euros to 73 billion euros this year and to 54 billion euros next year.

Germany’s large current account surplus, which has drawn international criticism, is likely to rise further from €258 billion to €312 billion this year and then to €306 billion next year.

Ifo is one of several economic research institutes that prepare joint forecasts for the German government twice a year in the autumn and spring.

The other institutes presented their own individual forecasts last week, which also predicted economic growth of between 0.2% and 0.4% this year, inflation of between 2.2% and 2.4% and overall unemployment from 2.7 million to 2.8 million.

The European Commission has forecast that the overall economy across the European Union will grow by 1% this year.

According to the Bundesbank’s most recent economic forecast from early June, German economic output will grow by 0.3% for the year as a whole.

In the medium term, central bank economists expect a slightly stronger increase of 1.1% in 2025 and 1.4% in 2026.

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