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The key rating drivers were strong fundamentals, economic weakness, decline in potential growth, rising unemployment, fairly small fiscal deficits, high political uncertainty and falling debt, albeit at a slower pace, the rating agency said in a release.
Fitch Ratings has affirmed Germany’s long-term foreign-currency issuer default rating at ‘AAA’, with a stable outlook, reflecting its diversified, high value-added economy and strong institutions, backed by a record of fiscal prudence and low government financing cost.
Medium-term growth prospects are weak, reflecting long-standing structural challenges.
Germany’s ‘AAA’ rating reflects its diversified, high value-added economy and strong institutions, backed by a record of fiscal prudence and very low government financing cost.
The record of persistent, high current account surpluses demonstrates the competitiveness of Germany’s export sector and supports its net external creditor and positive net international investment position.
However, medium-term growth prospects are weak, reflecting long-standing structural challenges.
Germany’s post-pandemic economic performance remains weak. The economy contracted by 0.1 per cent in real terms in the second quarter (Q2) this year, and the output level remains the same as two years ago. Growth underperformance relative to peers is mostly driven by investments and private consumption.
The manufacturing sector also continues to face challenges, with output 7 per cent lower than two years ago. The worse-than-expected Q2 2024 growth has contributed to a downward revision to the 2024 growth forecast to just 0.1 per cent, following a 0.3-per cent decline last year.
Fitch expects a more favourable cyclical outlook, brought by falling inflation and lower financing costs, and a recovery in global trade, to drive an acceleration in growth to 1.1 per cent in 2025 and 1.4 per cent in 2026.
Germany’s potential growth is likely to decline significantly, primarily due to an aging population and, to a lesser extent, the recent energy crisis.
Forecasts from various quarters indicate that potential growth will drop to between 0.7 per cent and 0.4 per cent in the coming years from above 1 per cent before pandemic.
Unemployment has gone up as the economy has slowed, although it remains low in absolute terms and employment continues to grow. Fitch expects the unemployment rate to remain around 3.5 per cent in the medium term, reflective of cyclical weakness in demand but also structural changes, it said in a release.
The rating agency continues to expect Germany to post fairly small fiscal deficits, at 1.7 per cent of gross domestic product (GDP) in 2024 and 1.4 per cent of GDP in 2025, in line with the country’s very strict fiscal rules, which require the structural fiscal deficit to not exceed 0.35 per cent of GDP.
Small fiscal deficits and moderate nominal economic growth mean Germany’s debt ratio will continue declining, but more slowly than in the post-pandemic period. Fitch expects the debt-to-GDP ratio to fall to 61.5 per cent in 2026 from 62.7 per cent in 2023.
The country faces political uncertainty as the coalition government has lost considerable public support. The coalition has delayed major reforms until after the September 2025 election due to diminished support and internal disagreements.
Germany’s external finances remain a key rating strength. Fitch projects the current account surplus (CAS) to rise this year to 6.5 per cent of GDP despite weaknesses in certain export sectors and declining global demand.
It anticipates a modest rise in the CAS during 2024-2025, stabilising close to 7 per cent of GDP.
Fibre2Fashion News Desk (DS)
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