The German economy is on the brink of recessionhowever, there are reasons for optimism, such as deflation in inflation, according to the federal government’s annual economic report.

“We are coming out of the crisis slower than we had hoped” Economy Minister Robert Habeck conceded and forecast marginal growth of 0.2% for this year, revising the government’s previous estimate of 1.3% GDP growth. Mr Habeck attributed the problems to the economy to the geopolitical changes that followed the war in Ukraine, but also to high inflation. Interest rates have risen, and they are putting pressure on companies and their investment activities, while at the same time the purchasing power of consumers has been limited, the minister explained and noted that the construction sector is particularly weakened.

“The global economic environment is unstable, global trade growth is historically low, which is a challenge for an exporting nation like Germany,” continued Robert Habeck and emphasized that he was seeking to “reinforce reforms.” In the 176-page report, particular emphasis is placed on limiting the labor force shortage, as there are 700,000 jobs, on reducing bureaucracy and on the need to improve the framework for investments. Germany “suffers from structural problems that have been accumulated for many years,” the Minister of Economy said.

Regarding the evolution of inflation, the government estimates that ito slow this year to 2.8%, from 5.9% in 2023. “Inflation has been tamed,” said Mr Habeck, adding that “wage increases are substantial and will be above inflation this year, so workers finally have real money in their wallets and their purchasing power is increasing”. According to the report, the record numbers in employment and the increase in the share of renewable energy sources are still an important reason for optimism.

Responding to criticism surrounding intra-governmental disputes, the Minister of Economy admitted that “many decisions were made with great noise, when they should have been made more quietly”, however, he countered that the government “had to take unpopular measures at great speed, for problems that had been unanswered for decades”.

For “very little economic dynamism” of Germany, the Minister of Economy Christian Lindner also spoke. Between the two finance ministers there is a difference of opinion regarding the financing of development measures. Mr Habeck would like a special fund with emergency funding, but Mr Lindner rejects the idea of ​​extra borrowing. From the opposition, the Christian Democratic Party (CDU) submitted a few days ago a proposal for a 12-point plan, which foresees, among other things, a limitation of social security contributions for businesses, but also more incentives for work. In this vein, the head of Munich’s Ifo Institute for Economic Research Clemens Fust points out that it is no longer worth it for many people to work full time – the social and tax systems are not properly coordinated, he explains.