German Economy Shrunk in 2023. What 2024 Holds for It?

German economy experienced a contraction in 2023, marking its first decline since the onset of the Covid-19 pandemic. As the nation navigates through a challenging economic landscape, the implications extend beyond its borders, posing a threat to the wider euro area.

German GDP Dips and Crises Loom

Germany’s Federal Statistical Office (Destatis) reported a 0.3% drop in Gross Domestic Product (GDP) in 2023 compared to the previous year. Destatis president Ruth Brand pointed out that the overall economic development faced challenges amidst various crises. She cited rising interest rates, weakened domestic and foreign demand, and persistently high prices across the economy as contributing factors.

Fourth Quarter Crunch

The woes continued into the fourth quarter, with a 0.3% decline in GDP compared to the previous quarter. While narrowly avoiding a recession in the second half of the year, Germany’s economic struggles have far-reaching implications for the entire euro area, given its position as the largest economy among the 20 member states.

Global Pessimism

A recent World Economic Forum (WEF) survey echoed the concerns, revealing that over three-quarters of economists anticipate weak growth in Europe in 2024. Furthermore, more than half of the economists surveyed expect a global economic slowdown this year, emphasizing the precarious nature of the current economic environment, according to WEF managing director Saadia Zahidi.

German Economy’s Sectoral Woes

The decline in German GDP reflects widespread weakness, particularly in the vital manufacturing sector. Fueled by faltering Chinese demand, high energy costs, and substantial interest rate hikes, the manufacturing sector faced a 2% contraction. Exports also took a hit, declining by 1.8%.

Spending Slump and Protests

Both household and government spending experienced a downturn, with government spending falling for the first time in almost two decades. This decline was attributed to the discontinuation of state-financed Covid-19 measures. Adding to the economic turbulence, a three-day national rail strike over pay and working hours, coupled with farmers’ protests against fuel subsidy cuts, disrupted the nation’s economy.

GDP Growth Forecast Challenges

Andrew Kenningham, Chief Europe Economist at Capital Economics, predicts a challenging year for Germany, with government spending cuts expected to weigh on economic growth. Kenningham noted that the recession will likely continue in the coming months, forecasting zero GDP growth in 2024.

Silver Lining in Employment

Amidst the economic gloom, the employment sector has a silver lining. In 2023, employment in Germany grew by a record 0.7%, with 333,000 more people joining the workforce compared to 2022. Foreign workers and a growing domestic labour force offset the dampening effects of Germany’s ageing population.

As the country grapples with economic challenges in 2024, the world watches closely to see how the German economy navigates the turbulent waters ahead.