The German economy will contract by 0.5% in 2024 due to the uncertainty caused by a budget crisis, the German economic institute IW said on Wednesday.

The government is struggling to strike a budget deal for 2024 after a court ruling last month upset its financing plans.

"The German government has played a decisive role in this crisis," IW Director Michael Huether said. "The coalition must now demonstrate its ability to act in terms of fiscal policy."

The dispute over the federal budget is unsettling companies, with many postponing their investment decisions for the time being, the economic institute said.

According to the IW calculations, government spending totalling more than 20 billion euros will be cut due to the court ruling, dragging GDP down 0.5%.

In the worst case scenario, a decline of one percentage point was even possible, the economic institute said.

Following a 0.5% GDP decline expected this year, next year should have seen a recovery, IW said. The institute noted that in the last 70 years, real gross domestic product only fell for two consecutive years in 2002 and 2003. While the German economy shrinks, other large economies were expected to grow, with Italy posting 0.5% growth, France 0.8%, the U.S. 1.3% and the global economy 2.5%, it said.

Even without the budget crisis, the IW noted that the German economic model based in exports was under pressure.

Global trade was expected to only grow by 1% in 2024, following a 1.5% contraction in 2023, and it would also be a challenging year for the construction sector due to high interest rates, it said.

Only the service sector would see a slight upturn, according to the IW. (Reporting by Maria Martinez; Editing by Alex Richardson)