Transition to fossil-free world partially dampening German economy’s growth prospects – institutes

The global emission-cutting drive is among several factors dampening the long-term growth outlook of Europe’s largest economy, the country’s leading economic research institutes said in their joint forecast. "Decarbonisation, digitalisation, and demographic change — alongside stronger competition from Chinese companies — have triggered structural adjustment processes that are dampening the long-term growth prospects of the German economy," said Geraldine Dany-Knedlik, head of forecasting and economic policy at the German Institute for Economic Research (DIW).

The institutes downgraded their forecast for 2024 and now see Germany’s economy shrinking by 0.1 percent, following a contraction of 0.3 percent last year. Higher energy prices mean that Germany’s energy-intensive industry is set to be less competitive in long term, the institutes said. But they warned against a one-sided policy focus to support industry.

“Even though gas and electricity prices have now fallen significantly again, it is becoming apparent that energy in Germany is likely to be more expensive in the foreseeable future than before the energy price shock and that this effect will make German energy-intensive production locations less attractive in international comparison in the long term,” the report said, adding that production in energy-intensive industries is around 15 percent below the 2021 level.

The energy price shock is likely to reduce manufacturing’s share of GDP, while the share of services is increasing, the institutes said. “The share of other activities, which are not industrial production but, for example, trading activities, has also increased within manufacturing companies,” according to the report.

“This makes it all the more important not to focus economic policy unilaterally on industry, but to promote productivity progress in the service sectors,” the report said. “Overall, there are no good economic reasons for aiming for a specific industrial quota, even if deindustrialisation in the sense of a reduction in the share of manufacturing in total value added continues.”

In a recent report, German industry association BDI said that the country’s industrial success in the future depends on businesses doing well on green technologies such as modern power grids, wind energy, green hydrogen production, electric mobility, and heat pumps. For several years now, the country's industry has been in favour of the transition, but criticises individual policies.