BERLIN The German economy is expected to shrink by 0.3% this year, as a loss in purchasing power due to high inflation and the tightening of financing conditions are weighing on consumption and investment, the European Commission said on Wednesday.

By comparison, the German government expects the economy to contract by 0.4% in 2023.

The euro zone's largest economy is struggling with the highest interest rates in a decade, high inflation and weakness in international trade. Declining industrial production and a shrinking construction sector are also taking their toll.

From next year domestic demand is set to improve, driven by a real wage increase. Together with recovering foreign demand, this is expected to support a pick-up in gross domestic product (GDP) growth to 0.8% in 2024 and 1.2% in 2025, according to the commission's autumn 2023 economic forecast.

The commission's forecast is noticeably less optimistic than that of the German government, which expects the German economy to rebound in 2024 and 2025, growing by 1.3% and 1.5%, respectively.

For 2023 as a whole, harmonised inflation is expected to fall to 6.2%, according to the commission's forecasts.

Inflation is expected to continue to decline, albeit less rapidly, falling to 3.1% in 2024 and 2.2% in 2025, it added.

Germany's public finances are starting to improve with gradually decreasing government deficits and debt-to-GDP ratios, the commission said.

In 2023, the German government deficit is projected to decrease to 2.2% of GDP from 2.5% in 2022, as COVID-19 pandemic measures are phased out.

In 2024, the government deficit is expected to further decrease to 1.6% of GDP, according to the commission's forecasts.

(Reporting by Maria Martinez; Editing by Miranda Murray and Sharon Singleton)