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Saturday, July 13, 2024

The German economy is displaying signs of improvement as inflation begins to ease

The German economy is slowly emerging from the crisis, as projected by the ifo Institute. Price-adjusted gross domestic product (GDP) is expected to rise by 0.4 percent this year and by 1.5 percent next year. Inflation is anticipated to decrease significantly, dropping from 5.9 percent in 2023 to 2.2 percent in 2024 and further to 1.7 percent in 2025.

Since the beginning of the year, sentiment among German businesses has improved. While most companies still assess the current situation as challenging, expectations for the upcoming months have risen across all sectors. The gradual recovery in German sales markets and the expected increase in new orders in manufacturing are contributing to this optimism. Moreover, manufacturing energy costs have returned to 2020 levels, enhancing profitability and enabling companies to reduce their order backlogs. Energy-intensive industries are also expanding their production.

Economic output in the second quarter is projected to grow by 0.3 percent, slightly faster than the previous quarter. Manufacturing, driven by export activities, is bolstering the economy, although the construction sector may continue to decline. Initially, private consumption is expected to stagnate, and the European Football Championship in Germany is not anticipated to have a significant economic impact, based on the experience of the 2006 World Cup, according to ifo.

Overall economic recovery is expected to gather pace later in the year as consumer spending returns to normal levels. Purchasing power among private households is forecasted to strengthen, leading to a gradual rebound in demand for goods. Despite strong wage growth maintaining price pressures, companies are constrained in passing on costs due to current capacity underutilization, likely resulting in reduced profits. The European Central Bank’s interest rate cut in June is anticipated to be followed by two more reductions this year. Lower interest rates, a stable labor market, and robust income growth will boost consumer spending. Consumer confidence is expected to improve, and the savings rate is projected to stabilize. Industrial activity is also poised to continue its recovery, benefiting from increasing global demand.

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