German leading economic institutes have downgraded their forecast for the country's growth this year and now see Europe's largest economy shrinking by 0.1%, they said in their autumn joint forecasts.

Output in Europe's largest economy will decline by 0.1% this year, five think tanks said in a joint statement on Thursday, after it shrank by 0.3% in 2023.

The new figure was a small but significant downgrade on the institutes' previous estimate of 0.1% gross domestic product (GDP) growth for 2024, made earlier this year.

"The German economy has been stagnating for more than two years," the institutes – DIW, Ifo, IfW Kiel, IWH and RWI – said in a joint statement.

"A slow recovery is likely to set in next year, but economic growth will not return to its pre-coronavirus trend for the foreseeable future," they said.

Germany's economy was the weakest among its large eurozone peers last year and has struggled to restore the momentum.

The institutes forecast growth to reach 0.8% in 2025, a downward revision on their previous estimate of 1.4%.

For 2026, they predicted the German economy to expand by 1.3%.

Germany, traditionally a driver of European growth, was the only major advanced economy to shrink in 2023 as it battled high inflation, an industrial slowdown and cooling export demand.

While inflation has slowly come down in 2024, a hoped-for recovery has failed to materialize between a continued industrial slowdown and weak demand in key market China.

Most recently, the economy underperformed analyst expectations in the second quarter, shrinking by 0.1%.

'Structural change'

The factors weighing on the economy "will only gradually disappear," DIW's head of forecasting Geraldine Dany-Knedlik said at a news conference.

"The early indicators for the third quarter suggest that economic output will once again fall slightly," Dany-Knedlik said.

Besides the weak period for the global economy, Germany's problems were being impacted by "structural change," she said.

Decarbonization and demographic factors, as well as stronger competition from China, were "dampening the long-term growth prospects," Dany-Knedlik said.

"The growth rate has been halved compared to the period between the financial crisis and the pandemic," said Oliver Holtemoeller from the Halle Institute for Economic Research (IWH). He noted that the average growth rate in Germany between 2011 and 2019 was about 1.4%.

The effects were being felt particularly in Germany's key manufacturing industry, which was hard hit by the increase in energy costs following the Russian invasion of Ukraine in 2022.

The rise of competitors in China making high-quality goods for export is "displacing German exports on world markets," the institutes said.

This is particularly true in the case of Germany's flagship auto industry, which has struggled to keep up with upstart Chinese manufacturers in the field of electric vehicles.

The rise of Chinese competition and the loss of market share in China has precipitated a sense of crisis among German carmakers.

Volkswagen, Europe's biggest auto manufacturer, said earlier this month it would have to consider closing factories in Germany as it battles to stay competitive.

The grim outlook for certain sectors would not keep the German economy from once again finding the tentative path toward growth, the institutes said.

Slowing inflation

Inflation in Germany will slow to 2.2% this year from 5.9% in 2023, according to the forecasts. The institutes said that it would hover around the 2% mark targeted by the European Central Bank (ECB) over the next two years.

Even with inflation on a downward path, consumption remains weak as high energy costs, feeble global orders and high interest rates take their toll.

Yet, the "revival of private consumption" driven by rising real incomes would boost the economy in the coming quarters, they said.

"The upturn in key sales markets, such as neighboring European countries, will support German foreign trade," they said, providing additional forward momentum.

The current economic slowdown had also been felt in the labor market, with "slightly increased unemployment," the institutes said.

Unemployment is seen edging higher this year to 6.0% from 5.7% in 2023, a level not expected to be reached again until 2026, the forecasts showed.

The German government's latest forecast envisages economic growth of 0.3% this year. An update is due in October.