KfW Business Cycle Compass: German economy is set for a gradual recovery

• Moderate economic growth expected in the coming quarters
• Conditions for spending-driven recovery remain intact
• A silver lining in 2025, including for investment

The economy headed into the summer without much momentum. KfW Research’s new summer forecast expects only moderate economic growth in the third quarter. But this will pick up in the ensuing quarters. For the coming year, we expect overall growth of 1.0% after 0.1% this year (previous forecasts: +0.3% for 2024 and +1.2% for 2025).

“The German economy will recover little by little in the coming quarters, but the annual growth rate will not be noticeably positive again until 2025”,

said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

“Consumer confidence has improved palpably since the low of January, and strong real wage increases mean that households’ purchasing power is strengthening. That means the conditions for a spending-driven recovery are intact. Business investment could stabilise in the second half of the year, as suggested by the growth in credit demand. Private investment in dwellings should expand again for the first time in five years in 2025, bolstered by continuing strong housing demand.”

The recovery in the euro area remains on track. The forecast for real growth in all of 2024 remains unchanged at 0.8%, followed by 1.3% in 2025 (previous forecast +1.5%). Household consumption is likely to remain the main driver of growth in the euro area in the short term as well, as it is in Germany, before the upswing broadens in the coming year.

The geopolitical and geoeconomic uncertainties, particularly in connection with the Middle East conflict and Russia’s invasion of Ukraine, remain among the persistent downside risks to the forecast. However, the economy may develop more positively than predicted if households reduce at least part of their recently increased precautionary savings in favour of higher consumption.

The current KfW Business Cycle Compass is available at: KfW Business Cycle Compass | KfW