The German economy faced significant shifts at the end of 2024, marked by legislative changes impacting taxes, unexpected inflationary pressures, and changing consumer behaviors. The recent modifications to the basic tax allowance, initiated by the Bundestag, promise to alleviate some financial strain for workers, but the economic outlook remains complex.
On December 2023, the Bundestag voted to raise the basic tax allowance retroactively to January 1, 2024, addressing concerns of cold progression. The basic allowance increased by 180 euros, setting the threshold at 11,784 euros, meaning this sum will be exempt from income tax. Coupled with this was the children’s allowance increase, which rose by 228 euros to 6,612 euros. Reports noted significant fiscal relief expected for families, with households estimating additional income by December.
According to projections from the German Taxpayers Association, individuals earning between 2,000 and 7,000 euros gross could see an increment of about 34 euros, whereas families with two children and a salary of 3,000 euros might receive 62 euros more. Although helpful, these figures suggest the relief is unlikely to lead to substantial lifestyle changes.
Compounding these economic adjustments is the concerning rise in inflation, which climbed to 2.6 percent in December, above the 2.4 percent economists had anticipated. Michael Heise, Chief Economist at HQ Trust, remarked about the alarming trend, stating, "Die Daten sind alles andere als ein Aufruf zu raschen Zinssenkungen." This higher-than-expected inflation reinforces the caution conveyed by the European Central Bank (ECB) when discussing future interest rate reductions.
Factors contributing to this inflation uptick include the incremental rise of the CO2 tax, now at 55 euros per ton, affecting gasoline prices, and other service-related cost spikes. Observations indicated service costs jumped by 4.1 percent, driven partly by wage increases, whereas goods prices increased at a more moderate rate of 1.7 percent. Despite energy costs exhibiting some relief, decreasing by 1.7 percent compared to the previous year, food prices rose by 2 percent, maintaining pressure on household budgets.
While the overall inflation for the year averaged below 3 percent, at 2.2 percent, it presents significant challenges to consumer confidence, which remains low as many households feel pinched. Jörg Krämer, Chief Economist at Commerzbank, echoed warnings about the unresolved inflation issues, stating, "Das Inflationsproblem ist noch nicht gelöst." He referred to the core inflation rate reaching 3.1 percent, excluding the volatile categories of food and energy.
Simultaneously, the automotive sector experienced notable shifts amid these changes. Experts noted a decline in electric vehicle sales attributed to the absence of financial subsidies previously offered to incentivize such purchases. Thomas Franke, Engineering Psychologist at the University of Lübeck, explained, "Verluste schmerzen uns etwa doppelt so stark wie Gewinne uns freuen," indicating how the removal of the incentives impacted consumer preferences. Consequently, hybrids became more favored, representing 34 percent of new registrations, as buyers aimed to balance fuel efficiency with practicality.
International trends highlighted stark contrasts, with countries such as Norway boasting electric vehicle market shares exceeding 90 percent. Meanwhile, hybrids and traditional gas-powered vehicles dominated the German market. Notably, SUVs continued to soar, constituting around 30 percent of new car registrations, reflecting comprehensive consumer preferences skewed toward size and utility. Conversely, sales for electric vehicles dipped significantly, with Tesla's market share diminishing by almost half, evoking concerns about the future of electric mobility within Germany.
Considering the economic backdrop of rising costs and shifts in consumer behavior as well as vehicle preferences, the outlook for Germany’s economy moving forward anticipates challenges. Persisting inflation paired with economic underperformance impacts household spending, which has remained tepid since the pandemic. Households curtail consumption largely due to rising living costs, which have surged nearly 20 percent since 2020, diluting savings and purchasing power.
Overall, as Germany heads toward the next fiscal year, close attention is warranted on inflationary trends, consumer sentiment, and the automotive market's swift changes. The government’s legislative adaptations may provide some relief, yet the underlying economic dynamics call for proactive policies to stimulate growth and restore consumer confidence.