DIW: Decarbonization among factors weighing on German economic growth outlook

Germany’s leading research institutes, headed by the German Institute for Economic Research (DIW), said the global trend towards reducing CO2 emissions is among the key factors weighing on the growth outlook for Europe’s largest economy. According to the published forecast, Germany’s gross domestic product (GDP) is expected to shrink by 0.1% this year. Only a slow recovery is expected in the coming years, with growth of 0.8% in 2025 and then 1.3% in 2026.

In a press release, DIW said the outlook had been revised down compared with the forecast from spring this year, by 0.2 percentage points for 2024 and 0.6 percentage points for 2025.

Dr Geraldine Dany-Knedlik, head of forecasting and economic policy at DIW, said that in addition to the weak economy, structural changes are also affecting the German economy.

“Decarbonization, digitalization, demographic change and probably also stronger competition from Chinese companies have triggered structural changes that are weighing on the growth outlook for the German economy,” Dr Dany-Knedlik added.

The research institutes said Germany’s energy-intensive industries would be less competitive in the long term because of higher energy prices.

“Although natural gas and electricity prices have fallen significantly again, it is becoming clear that energy in Germany will probably be more expensive in the near future than it was before the energy crisis, making German energy-intensive production facilities less attractive than their international competitors in the long term,” the institutes said, adding that output in energy-intensive industries is currently around 15% below its 2021 level.

The energy crisis mentioned is likely to lead to a decline in manufacturing’s share of GDP, while the share of services will grow.

“That is also why we should not focus solely on supporting industry, but also on promoting productivity growth in the services sector. Overall, we see no economic reason to target a specific share for industry, even though deindustrialization, in the sense of a decline in manufacturing’s share of total value added, is continuing,” the institutes added.