Germany: Economic Outlook Stable Despite Near-term Stagnation and Fiscal

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The coalition government will face difficult trade-offs to agree on the 2025 budget by this summer. Savings of EUR 15bn-EUR 30bn (3.2% to 6.3% of the 2024 budget) need to be found, requiring spending cuts across most ministries. Such cuts often result in lower net investment, leaving the government less able to address Germany’s longer-term challenges.

Germany Retains Significant Room for Fiscal Manoeuvre to Tackle Longer-term Challenges

Germany’s fiscal position stands in sharp contrast to the public finances of Europe’s other large economies, including the United Kingdom, France and Italy, which all face high government deficits as well as high and, in the absence of credible fiscal consolidations plans, rising public debt over coming years.

Germany continues to have significant fiscal space to fund growth-enhancing investments. In the five years leading up to the Covid-19 pandemic, the country ran general government primary surpluses averaging 2.2% of GDP. Over the next five years, however, we expect continued deficits as the government faces rising spending pressures and makes use of existing flexibility within the debt brake that permits a deficit of up to 0.35% of GDP. Even with this looser fiscal stance, Germany’s debt-to-GDP ratio is expected to decline over the next few years, reaching 59% by 2028, down from 64% in 2023.

Near-term challenges for Germany’s sovereign rating relate to growing geopolitical risks including possible further escalation of Russia’s war in Ukraine, uncertainty regarding the outcome of US elections in November and rising tensions between western governments and China, factors over which the German government has limited control.

The longer-term challenges to Germany’s sovereign rating relate to transition risks for its energy-intensive industries and rising spending pressures related to an ageing population. Higher net investments and raising the growth potential are important remedies for both.

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Eiko Sievert is a Director in Sovereign and Public Sector ratings and member of the Macroeconomic Council at Scope Ratings GmbH.



This article was originally published by a www.fxempire.com

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