(Bloomberg) -- The Bundesbank sees the German economy barely growing in 2024 after its contraction this year, according to fresh forecasts published Friday. 

Sluggish exports are dragging down industry, consumers spending is restrained and higher financing costs are dampening investment, it said. Still, a projection for 2023 output was revised up to show a decline of just 0.1%.

“As from the beginning of 2024, the German economy is likely to return to an expansion path and gradually pick up speed,” Bundesbank President Joachim Nagel said in a statement. Growth is expected to accelerate from 0.4% next year to 1.2% in 2025.

“Exports will rise on the back of expanding foreign sales markets,” the Bundesbank said. “And, owing to the stable labor market, strong wage growth and falling inflation, households will spend more money on consumption again.”

The outlook highlights Germany’s lingering malaise as weak global demand leaves its outsized industrial base stuck in a rut. The upshot stretches beyond the country’s borders: Economists reckon the slump has dragged the euro zone into its first recession since the pandemic in the latter half of 2023.

Even the labor market, which has been surprisingly resilient in the face of steep interest-rate increases by the European Central Bank, has started to crack. In November, the unemployment rate rose to its highest level since 2021. 

There’s been some relief this week from Berlin, where budget chaos unleashed by a shock court ruling was settled. The ruling coalition agreed to restore debt rules next year — averting a political and potentially economic crisis.

The Bundesbank said its projections were concluded before the government reached its deal. “According to a preliminary assessment, however, they will not significantly alter the fiscal and macroeconomic outlook,” it said. 

On inflation, which has contributed to Germany’s struggles, the Bundesbank predicts a faster slowdown than before. Consumer-price growth is seen at 6% this year and 2.5% in 2025. Core inflation, which strips out volatile elements like food and energy costs, is set to take longer to come down toward 2%.

“Inflation in Germany is on the decline, but it is still too early to sound the all-clear,” said Nagel, who is a member of the ECB’s Governing Council. “Monetary policy tightening is increasingly yielding results.”

 

The Bundesbank published its projections a day after the ECB left its deposit rate at a record 4%. But even as new projections out of Frankfurt pointed to inflation receding more quickly than thought across the 20-nation euro zone, President Christine Lagarde struck a cautious tone.

“We should absolutely not lower our guard” she told reporters, citing potential upside risks to prices from wages and corporate profits.

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