09:26 AM EST, 11/21/2024 (MT Newswires) -- Without major policy changes, the German economy's long-run growth potential is extremely limited, said Berenberg.

The most recent official estimates, published last Friday by the European Commission (EC), project a mean German annual potential growth of barely 0.7% for the remainder of the decade. Although at 1.3% it was markedly higher on average in the 2010-2019 period, the downtrend started well before the pandemic, with potential growth dropping from 1.7% in 2015 to 1.1% in 2019.

Even so, the EC's numbers are probably too optimistic, stated the bank. In September, the semi-annual Joint Forecast (JF) by leading German economic research institutes calculated an average annual potential growth of 0.4% in the five years ahead. The JF modifies the EC's methodology, improving the plausibility of the labor and total factor productivity components -- but it also includes a higher growth contribution from capital than the newer EC projections. Risks would be tilted further to the downside.

Because of demographic change, the total number of hours worked is on course to shrink in the second half of this decade. The green transition consumes enormous resources, even more so due to inefficient government micromanagement, added Berenberg. Excessive regulations and a rising share of less-skilled workers are weighing on productivity growth.

Germany is headed for early parliamentary elections on Feb. 23. The new government will probably go for at least some pro-growth reforms. However, it will likely fall short of the large-scale tax and welfare reforms, deregulation and fundamental shift in energy policy needed to push average potential growth to even 1% in 2025-2029, according to the bank.

There is a good chance that Germany will stage a cyclical recovery in 2025/26, with GDP expanding at a far faster pace than potential. Policymakers must not mistake this for a sign that reforms are becoming less urgent, said Berenberg.