Despite Germany’s relatively good performance last quarter, the International Monetary Fund believes that structural issues such as aging and lack of investment remain.
The second estimate for the Eurozone quarter-on-quarter gross domestic product (GDP) report was released on Wednesday morning, at 0.3% in Q1 2024, according to Eurostat, in line with market estimates. This was also a step up from the last two quarters’ -0.1%. Q1 2024 saw the eurozone experiencing the strongest GDP performance since Q3 2022.
German GDP made an especially strong comeback, rising to 0.2% from -0.5% in the previous quarter. This was likely to have been due to increasing exports, as well as robust manufacturing in the beginning of the year. Although the country did reportedly see a slight recession at the end of last year, it was not as bad as previously expected.
However, Germany still has problems with issues such as aging, under-investment and red tape, which may be harder to fix. According to the International Monetary Fund (IMF) a mix of structural and temporary issues have contributed to the country’s disappointing performance over the past few months.
IMF said on its website: “On the temporary side, when inflation surged, consumers cut back on purchases. The European Central Bank also raised interest rates to prevent higher inflation from becoming entrenched, which in turn depressed housing construction and other interest-sensitive sectors.
“A post pandemic rebalancing of global demand away from manufactured goods and back toward services was also unfavourable for Germany’s manufacturing-intensive economy.
“The good news is that these temporary headwinds should gradually fade over the next year or two. The bad news is that a more fundamental structural headwind – sluggish productivity growth – is likely to remain, absent reforms, while another – population aging – will accelerate sharply.”
EU inflation likely to come down closer to 2% target in 2024
The French economy rose to 0.2% in Q1 2024, up from 0.1% in the previous quarter, while Italy advanced to 0.3% from 0.1% in the previous quarter. Spain also jumped 0.7% this quarter.
The European Commission’s Spring Forecast 2024 sees the EU’s GDP inching up about 1% this year, which is a little better than the 0.9% expected in the Winter 2024 report.
Germany is expected to see a 0.1% growth, whereas Italy will most likely expand by 0.9% and France by 0.7%.
EU inflation, on the other hand, is expected to fall to 2.7% this year, from 6.4% in 2023.
The figure is expected to slip even further to 2.2% in 2025.
Coming to the euro area, inflation is expected to drop to 2.5% in 2024, from 5.4% in 2023, before falling to 2.1% in 2025.
