Economic outlook: OECD lowers forecast for Germany

The German economy is gradually struggling to get out of the doldrums.

Economic outlook: OECD lowers forecast for Germany

The German economy is gradually struggling to get out of the doldrums. However, no big jumps in gross domestic product (GDP) are expected, even after the surprising, slight growth at the beginning of the year. This is shown by the OECD's current economic outlook, which was published in Paris on Thursday. For 2024, the economic experts at the industrialized nations organization now only expect an increase of 0.2 percent. A new analysis by the consulting firm EY shows that Germany is continuing to become less attractive as a location for foreign investors.

With the new forecast, the Organisation for Economic Co-operation and Development (OECD) has once again revised its expectations for economic growth in Germany downwards. It had already lowered its growth forecast in February. At that time, it was expecting growth of 0.3 percent instead of the 0.6 percent it had assumed in November.

Growth is likely to be low

The OECD is now somewhat more pessimistic than the federal government. The latter recently raised its growth expectations slightly for the full year 2024 from 0.2 percent to 0.3 percent. However, the OECD is expecting more momentum for Europe's largest economy next year: an economic increase of 1.1 percent is then expected. Nevertheless, Germany is lagging behind: worldwide, the OECD expects growth of 3.1 percent this year and 3.2 percent next year, and in the euro area an increase of 0.7 percent and 1.5 percent respectively.

The OECD sees the main obstacle to growth as uncertainty with regard to planned tax incentives for “green” investments after the Federal Constitutional Court declared the reallocation of 60 billion euros in the 2021 budget to the climate and transformation fund invalid. This is putting a strain on investor confidence. High interest rates have also depressed investments in the housing market, among other things.

Foreign investments in Germany continue to decline

Meanwhile, an analysis by the consulting firm EY showed that investors from abroad have once again reduced their involvement in Germany. Last year, foreign companies announced 733 investment projects in this country - twelve percent less than the previous year. This is the lowest level since 2013 and the sixth decline in a row.

In a European comparison, Germany remains in third place - but the gap to Primus France has increased again. EY counted five percent fewer projects there, but still 1,194. Great Britain follows with 985 projects (plus six percent). EY recorded the highest number of foreign investments in Germany with 1,124 projects in 2017. Before the 2019 corona pandemic, the number was 971. EY has been carrying out the study since 2006. Information on the investment volume was not provided.

EY boss: “Germany is being left behind”

The chairman of the EY management board, Henrik Ahlers, considers the decline to be a worrying development: "This is an alarm signal. Germany is being left behind, other European locations are developing much more dynamically," he warned. Since 2017, the number of investment projects in Germany has fallen by 35 percent, while France has increased by 20 percent. "France is the big winner from Brexit. Germany, on the other hand, has lost even more investment than Great Britain."

The reasons for Germany's weak performance are the high tax burden, high labor costs, expensive energy and the country's bureaucracy. "The result: investments are falling, the mood among consumers and companies is in the basement, and the economy is developing weaker than in any other industrial country."

US investors are reducing their commitment

US companies were still the most important investors in Germany last year - but the number of projects shrank by more than a fifth. US investors have not written off the location, but trust has been shaken. The top priority should be to restore this. However, he did not expect a quick recovery: "The problems in Germany are deep and are also structural. A trend reversal will therefore not happen overnight," he said. A tax reform and reduction in bureaucracy are necessary. The OECD also recommended something similar.

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