Bundesbank: Germany's new government faces tough economic climate

The Bundesbank's February economic report has been published.

The report said the future of German industry remained uncertain, adding that high levels of economic uncertainty and currently very low capacity utilization continued to put pressure on investment.

The report, which stated that a slight recovery in the economy is expected in the January-March period of the year, said: "Despite the ongoing weak economic trend, the German economy could record slight growth in the first quarter of 2025. Industry could be less of a drag on growth in the winter quarter than before, and the construction sector could remain at about the same level as the previous quarter."

The bank's report stated that demand in the industrial and construction sectors has recently recovered somewhat in terms of incoming orders, while exports have had a particularly strong impact on economic activity in recent months.

The report, which pointed out that the coalition government to be established in Germany will take office in a difficult economic environment, included the assessment that "In terms of the basic trend, the German economy continues to be stuck in stagnation."

The report, which includes assessments of inflation, stated that the annual inflation rate in the country is expected to decrease in the coming months and rise again temporarily from the middle of the year.

Bundesbank supports adapting debt brake to "changing conditions"

The Bundesbank report emphasized that it is important to eliminate structural weaknesses and ensure resilient public finances in the country, but noted that raising the government's budget deficit limit could be justified if infrastructure and defense investments are needed at a time when public debt is low.

The report said action needed to be taken in areas such as public infrastructure and sustainable financing of defense spending, adding that there was room to adapt the country's debt brake to "changing conditions."

The report noted that politicians face challenges such as both addressing structural weaknesses and ensuring sound public finances, and noted:

"Action is needed in areas such as public infrastructure and sustainable financing of defence spending. Tax burdens and spending rates already remain relatively high. Demographic developments will place an additional burden on public finances. In such a contradictory situation, binding fiscal rules such as the debt brake make a crucial contribution to ensuring sound state finances. However, in principle, it is entirely justifiable to adapt the credit limit of the debt brake to changing conditions when the public debt ratio is low."

Meanwhile, the "debt brake", which came into effect in 2009 following the global financial crisis and limited the government's borrowing by imposing a rule that the budget deficit should not exceed 0.35 percent of the country's GDP, was one of the most important issues in the party's election campaigns in the country.

While views on whether to maintain or ease the debt brake differ among potential coalition parties, analysts predict that the constitutional mechanism will be loosened sooner rather than later in order to stimulate the German economy and finance higher defense spending.

Meanwhile, Germany's economy is set to shrink for a second consecutive year by 0.2 percent in 2024 as increasing competition with China and structural problems weigh on the economy.

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