(Bloomberg) -- Germany sees its faltering economy expanding by just 0.2% this year — a much flatter rebound than the 1.3% that Chancellor Olaf Scholz’s government was predicting as recently as the fall.

Geopolitical tensions and high interest rates are weighing on the recovery, though rising real wages and a robust labor market should help over the course of 2024, Economy Minister Robert Habeck, who first revealed the meager growth outlook last week, said Wednesday in a statement.

While private consumption fell by 0.4% in 2023, it’s seen rising 0.5% this year, according to the government’s economic report, which Habeck presented in Berlin.

“The situation is extremely challenging,” he told reporters. “We need to do more to tackle the reforms in order to maintain Germany’s competitiveness in a completely changed environment.”

Europe’s largest economy is reeling from a manufacturing downturn that’s raising questions about the future of its key industrial sector. Output shrank 0.3% last year amid weak global demand, high inflation, fallout from the loss of cheap Russian energy supplies and a court decision curbing budgetary spending.

The future’s not looking much rosier: The government also slashed its 2025 growth projection to 1%, though consumer-price gains are expected to ease back to 1.9%.

Habeck described a lack of skilled workers as Germany’s “biggest challenge,” saying the nation already has 700,000 vacancies. “We lack hands and heads to do the work,” he said. “This gap will continue to widen and will further reduce potential growth.”

While one solution is allowing in more immigrants, the politics around such ideas have been complicated greatly by the rise in opinion polls of the far-right AfD party.

“The debate also revolves around who we are as a country,” Habeck said. “If we don’t see all these people as partners and friends then the economy will collapse.”

Finance Minister Christian Lindner has joined Habeck in drawing up relief plans for companies — to be announced in the coming weeks — though Scholz must still be convinced. Tax breaks will probably be the focus since Lindner, who also leads the liberal Free Democrats party, opposes subsidies as he tries to fill budgetary holes. 

Bundesbank President Joachim Nagel said last week that German output may have shrunk at the start of 2024, suggesting it will “stagnate at best” between January and March. “Current sentiment indicators don’t point to a noticeable upturn at the start of this year,” according to the government’s economic report.

“The good news is that inflation is falling,” Lindner told lawmakers earlier in the day. “We have managed to bring inflation under control in Europe.” 

The government’s annual report was approved by cabinet on Wednesday and underpins next year’s fiscal plans. 


(Updates with Habeck comments starting in fourth paragraph.)

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