Germany's central bank on Friday sharply cut its growth forecast for next year, saying it would take time for Europe's top economy to pull itself out of the doldrums.

The Bundesbank expects output to be 0.4 percent in 2024, down from its last forecast of 1.2 percent in June.

In 2023, Germany's economy is expected to shrink slightly as it battles high energy and food costs, a manufacturing slowdown and global economic weakness.

And while a recovery will begin next year, it will be "subject to some time lag," the Bundesbank said in its latest projection.

Weak foreign demand remained a drag on industry, private consumption was still restrained and higher financing costs were dampening investment, it said.

Earlier this week, two leading economic institutes also downgraded their growth forecasts for the German economy for next year.

However, Bundesbank president Joachim Nagel struck an upbeat tone, saying the economy "is likely to return to an expansion path and gradually pick up speed".

Next year, inflation is set to be half what it is expected to be this year, the central bank said.

The European Central Bank has hiked interest rates aggressively, and price rises have started easing fast in recent months.

The economy is expected to gain further momentum in 2025 and 2026, growing 1.2 percent and 1.3 percent respectively, the Bundesbank said.

It will be buoyed by accelerating foreign sales and rising household consumption.

The forecast took into account a ruling by Germany's top court last month that the governing coalition had broken constitutional debt rules, which forced Berlin to hastily rewrite its 2024 budget.

The projections were finalised before the government reached a deal this week on the spending plans, but the Bundesbank said it did not believe this would have a significant impact.

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