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German Economy Expected to Contract by 0.5% Amid High Inflation: Study

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German Economy Expected to Contract by 0.5% in 2023

According to a study published today by the IW Institute, the German economy is projected to shrink by around 0.5% this year due to weak domestic consumption and persistently high inflation.

Economic Weakness and High Interest Rates Hamper Investment

The Institute’s report highlights that economic weakness and high interest rates continue to discourage investment, keeping it below pre-crisis levels. Moreover, with inflation remaining high, private consumption is dragging down the economy, and real investment is expected to fall below pre-crisis levels in 2023. As a result, GDP is predicted to decrease by 0.5% compared to the previous year, and the unemployment rate is forecasted to rise to 5.5%.

External Shocks and Geopolitical Uncertainty Add to Challenges

The study emphasizes that the German economy is still grappling with the repercussions of external shocks, primarily stemming from the conflict in Ukraine and the resulting Western sanctions. Additionally, tensions with China and an uncertain geopolitical situation in several developing countries introduce uncertainty regarding access to raw materials and energy resources, posing further risks.

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Weakened Global Demand Impacts German Economy

The German economy is also being impacted by sluggish global demand, with the worldwide economy expected to grow by 2.5% this year. This contributes to the challenges faced by Germany, as it heavily relies on international trade.

Projected Increase in Public Debt

The report predicts that Germany’s public debt will rise to 65% of GDP this year. However, it assumes that the German economy will eventually stabilize and bring the debt level back down to a more normal level of 60%.

Consumer Confidence in Germany Drops

Earlier today, data revealed a decline in consumer confidence in the German economy, which is the largest in Europe. According to the research institute GfK, the consumer confidence index fell to minus (-) 25.5 points by September 2023.

Source: News

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