Scholz Advisers See German Economy Picking Up Into Next Year

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(Bloomberg) -- Germany’s economy will gain some momentum in coming months, supported by strengthening household consumption, although it will still barely muster growth this year, according to Chancellor Olaf Scholz’s independent panel of experts.

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Gross domestic product is set to increase by just 0.2% in 2024, the advisers predicted in a twice-yearly report published Wednesday in Berlin, joining other forecasters in scaling back earlier growth projections. Next year, GDP is likely to expand by 0.9%, as Germany also benefits from stronger global trade, they added.

The report from the Council of Economic Experts is the latest sign that Europe’s biggest economy is poised to emerge from a period of near-stagnation that has persisted for more than a year.

Surveys point to improving sentiment, particularly in the services sector, while consumers are benefiting from slower inflation and rising real incomes are expected to be a key driver of the recovery.

Scholz on Wednesday blamed a combination of weaker demand from China, geopolitical uncertainty triggered by Russia’s war on Ukraine and the resulting energy shock and inflation surge for Germany’s recent woes.

“It is therefore good news that inflation is now back at around 2%,” the chancellor said at a chamber of commerce forum in Berlin.

“The business outlook is also improving,” he added. “A stable upturn is possible.”

An additional lift will come from a cut in interest rates “this summer” by the European Central Bank, Scholz’s advisers predicted.

“The resulting improvement in financing conditions for companies will boost private investment,” according to Ulrike Malmendier, a member of the five-strong panel and a professor of finance at the University of California.

At the same time, Germany continues to underperform compared to its European and Group of Seven partners.

The European Commission expects German GDP to increase by just 0.1% this year, according to updated forecasts published Wednesday. That compares with 0.7% in France, 0.9% in Italy, 0.5% in the UK and 2.4% in the US.

Looking further ahead, Scholz’s advisers were downbeat about Germany’s growth prospects, predicting that they “remain weak until the end of the decade in terms of production potential.”

“Demographic change and the resulting decline in the supply of labor are weighing on the medium-term growth outlook,” they added, estimating potential expansion at 0.5% in 2024 and 0.4% in 2025. “It is likely to remain at this low level until 2029,” they said.

--With assistance from Michael Nienaber.

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