In the spring of 2024, the German economy remained in a phase of persistent weakness. The economic recovery that had been predicted last autumn for the six winter months of 2023/24 failed to materialize. Although the economy is expected to pick up from the first quarter of 2024 onward, the pace of recovery is likely to be muted. Against this backdrop, the economic research institutes contributing to the Joint Economic Forecast have significantly lowered their growth forecast for Germany. In their recent spring report, they predict a small year-on-year increase of 0.1 percent for inflation-adjusted GDP in 2024. In their autumn report, the research institutes had anticipated a growth rate of 1.3 percent.

According to the recent spring report, the main growth stimulus in 2024 will be consumer spending, driven by declining inflation, rising wages, and a robust labor market. The economic researchers believe that the prospects for investment have deteriorated, however. Investment in residential and commercial construction is projected to fall once again. Furthermore, foreign trade and spending on capital equipment are unlikely to provide any growth impetus in 2024. German companies’ international business is not expected to become a strong driver of economic growth again until next year.

The research institutions anticipate that consumer prices will increase by an average of 2.3 percent in 2024, followed by 1.8 percent in 2025. With prices for energy commodities falling, inflation is expected to stem primarily from domestic price rises in the forecast period. In the labor market, the number of people in work is predicted to rise by just under 200,000 to 46.1 million. The unemployment rate is likely to edge up by just 0.1 percentage points to 5.8 percent.

This year, western central banks’ tightening of monetary policy has reached a peak for now. The US Federal Reserve and the Bank of England kept their key interest rates unchanged in June, whereas the ECB decided to lower its rates for the first time in June. It reduced the deposit facility rate by 25 basis points to 3.75 percent on June 6, 2024, citing falling inflation in the eurozone. However, it did not provide any clear indication of its interest-rate policy going forward in view of ongoing inflation risk.

On March 13, 2024, the ECB published changes to the operational framework for implementing monetary policy. Under these changes, the central bank will establish a demand-driven system of money market management with a lower bound on interest rates in the form of the deposit facility rate once there has been sufficient progress with reducing bond holdings and excess liquidity. This system is based on the premise of a greater volume of excess liquidity than before the financial crisis in the Eurosystem. The reason for this given by the ECB is that banks’ liquidity preferences have changed, partly due to regulatory requirements regarding loss allowances. In view of this higher demand for liquidity, the central bank intends to establish longer-term refinancing operations and a structural portfolio of bonds.

The aforementioned effects on the overall economy also impact on the outlook for the banking sector in various ways. For example, risk costs in the lending business are expected to go up again owing to economic uncertainties and the rise in interest rates. Weaker economic conditions are likely to cause many companies’ resilience to stagnate or even decline, which, in combination with higher interest rates, could adversely affect the servicing of debt. Net interest income is predicted to hold steady or fall in 2024, partly because the ECB will probably reduce its key interest rates further and partly because interest rates on liability-side products will continue to rise in 2024. Although only relatively modest growth in the volume of new lending is anticipated in 2024, the extension of existing loans will provide a boost to interest income. The volume of real estate finance in 2024 is expected to be on a par with 2023 because the higher level of interest rates will push up the overall costs of home ownership significantly and lead more frequently to a situation in which taking on the servicing of the debt is inappropriate. However, growth will be around the lower end of the long-term trend. Moreover, the general fall in property prices along with an increase in average debt service capacity, primarily due to collectively agreed pay rises, should result in a new equilibrium being reached.

From an operational perspective, the Cooperative Financial Network made a successful start to 2024. The aforementioned risks posed by macroeconomic conditions and competition based on rates on the liabilities side will have a significant impact on financial performance over the course of the year. In light of the muted economic outlook, the associated moderate prospects for new business, and the likely rise in interest expense, net interest income is predicted to fall markedly in 2024 compared with the level recorded in 2023. Net fee and commission income will increase slightly year on year in 2024 and continue to make a significant contribution to earnings. The bulk of fees and commissions will continue to be generated from payments processing and the brokerage of investment products.

There will be a further net gain under gains and losses on investments in 2024 thanks to anticipated reversals of impairment losses on investments, although the net gain will be considerably smaller than in 2023. We still do not anticipate any material credit-quality-related risks in connection with investments. Weak macroeconomic conditions mean that expenses for loss allowances will rise once again in 2024 due to the expected rise in loan defaults in the customer business, especially among corporate customers. Net income from insurance business is predicted to rise sharply in 2024. This projection is based on the expectation of a healthy operating performance in the insurance business.

Administrative expenses are expected to be slightly higher in 2024 than in 2023, primarily owing to inflation-related wage increases.

The regulatory capital ratios will rise sharply over the course of 2024 because growth rates in the customer lending business – and in the resulting volume of risk-weighted assets – will be less pronounced than the increase in profit retention.

In spite of the challenging geopolitical conditions, the Volksbanken Raiffeisenbanken Cooperative Financial Network was able to generate significantly higher profit before taxes in the reporting year than originally projected. Based on current assessments, profit before taxes in 2024 is predicted to be much lower than in 2023 as the macroeconomic environment is expected to remain difficult.