ISTANBUL

Real gross domestic product (GDP) growth in Germany is expected to increase 0.2% this year and 1.3% next year, after declining 0.2% in 2023, according to the International Monetary Fund (IMF) on Thursday.

The German economy has begun to recover from the energy-price shock, and gradual economic recovery is expected to continue this year, the financial agency said in a statement.

"High energy prices arising from the shut-off of Russian (natural) gas contributed to surging inflation during 2022–23, which in turn weighed on economic activity," the IMF said in its Staff Concluding Statement of the 2024 Article IV Mission.

"The impact of this shock was, however, greatly mitigated by a strong policy response, including the provision of income support while preserving incentives to conserve energy," it added.

The IMF said energy conservation efforts, together with steps to secure new energy supplies, have helped return wholesale natural gas prices in Germany to more normal levels, while lower energy prices have in turn, with monetary tightening, have stimulated rapid disinflation.

Real wages are now growing and the economy expanded in the first quarter of 2024, it said, adding "A return to growth is, in turn, expected to reinforce confidence, which, alongside a gradual easing of monetary policy, should further bolster consumption and investment next year."

The agency said inflation is expected to slowly ease further, as lower energy prices continue to pass through to retail prices, with core inflation remaining above headline inflation due to robust wage growth.

Rapid population aging, however, is expected to slow GDP growth to below 1% over the medium-term, unless there are significant increases in productivity or much higher-than-expected immigration, it said. "Rapid population aging is also expected to significantly increase pension and healthcare costs."

The IMF stressed that risks to Germany's outlook are broadly balanced.

Upside risks include the possibility that positive economic developments could lead to a faster-than-expected recovery in consumption and investment, against downside risks such as higher geo-economic fragmentation, worsening global conflicts, and intensifying stress in global commercial real estate markets.

The financial agency forecasts headline inflation in Germany falling to 2.5% this year and 2.2% next year, after 6% in 2023, while it expects core inflation to come in at 3% in 2024 and 2.3% in 2025, following 6.3% last year.