GDP is expected to grow by 1.3% in 2024 and 1.5% in 2025, before strengthening to 1.9% in 2026, based on the measure not adjusted for sports events. Growth will be driven by improving domestic demand, declining inflation, more favourable financing conditions, and rising employment. Heightened uncertainty about external demand, especially in Germany, and the strong domestic currency pose challenges for exports. Inflation has fallen and will remain near 1.0% in 2025 and 2026. Geopolitical tensions might drive up commodity prices, potentially pushing inflation beyond current projections.

The overall fiscal stance will remain broadly neutral over the next two years, although a small improvement in fiscal outcomes will allow public debt to decline relative to GDP in 2025 and 2026. Monetary easing is expected to continue in 2025, with inflation decreasing at a faster pace. Enhancing the digital transformation across all sectors of the economy would boost productivity growth.

Economic growth is estimated to have increased by 0.2% in the third quarter of 2024. Growth was mostly driven by exports from an expanding chemical-pharmaceutical sector. By contrast, the rest of the manufacturing sector contracted, and the services sector experienced below-average growth. The labour market has been robust despite some recent weakening. In October, the number of jobseekers was 2.5% higher than a year earlier, while the seasonally-adjusted number of reported vacancies rose by 1.6%. Labour shortages are high with respect to historical norms, and particularly prevalent in healthcare, engineering and information technology. Inflation dropped to 0.6% in October, down from 1.1% in August and 0.8% in September.

The banking sector remains susceptible to international economic downturns, especially in the euro area. Changing global financial market conditions may particularly affect fee-based income streams in wealth management, asset management, and investment banking, where revenues heavily depend on client assets, transaction activity, and market conditions.

The Central Bank reduced the benchmark rate by 25 basis points to 1.0% in September 2024 in response to rapid disinflation. A further reduction to 0.75% is projected to take place before the end of 2024, followed by an additional cut to 0.5% in early 2025. Extraordinary fiscal spending will progressively be phased out. Until 2025, current receipts are set to grow at a significantly faster pace than current expenditure, despite the stronger growth of defence spending. Government net lending is projected to fall to 0.3% of GDP in 2024 and remain broadly unchanged over 2025-26. Public debt is projected at 39.1% of GDP in 2024, slowly falling to 38.6% of GDP by 2026. The overall fiscal stance is assumed to be broadly neutral in the next two years.

Real GDP is projected to grow by 1.3% in 2024, on the back of a fast recovery of private consumption. Falling inflation and ongoing monetary easing will further boost domestic demand, with GDP projected to rise by 1.5% in 2025 and 1.9% in 2026. Consumer price inflation should reach the 1% midpoint of the Central Bank’s target range in the first quarter of 2025 and remain at that level throughout 2025 and 2026. Slower-than-expected monetary easing in major economies could exacerbate vulnerabilities in financial markets, particularly if domestic pension funds achieve returns below global yields. Meanwhile, a sharper downturn in Germany or a more significant slowdown in the US or China could severely diminish export prospects. On the upside, lower inflation than in main trading partners could strengthen export competitiveness and lift export growth above current projections.

The economy is facing pressures from an ageing population, the need to adapt to climate change and meet emission reduction commitments. Demographic challenges could be addressed by automatically adjusting retirement ages with increasing life expectancy, while incentives for delayed retirement could be strengthened. Reskilling programmes could be improved further to maintain older workers’ labour market attachment, coupled with measures to increase the labour force participation of women, especially migrant women. The transition to zero-emission energy sources could be accelerated, especially in the transportation and construction sectors. Enhancing the digital transformation would lead to higher productivity growth.