The German economy shrank slightly in 2023, official data showed on Monday, as expensive energy, high interest rates and cooling external demand weighed on Europe’s export giant.
Production shrank by 0.3% year-on-year, according to preliminary data from the federal statistics agency Destatis.
“Overall economic growth declined in Germany in 2023 in an environment that continues to be characterized by multiple crises,” the agency’s Ruth Brand said at a press conference in Berlin.
Europe’s biggest economy likely saw a 0.3 percent drop in gross domestic product in the final quarter of the year, the agency estimated, again in preliminary figures.
It also revised third-quarter data from a 0.1% contraction to stagnation, meaning Germany avoided a technical recession at the end of two consecutive quarters of negative growth.
The German economy has faced serious headwinds since Russia’s war in Ukraine drove up inflation, particularly energy costs.
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The price increases contributed to a sharp downturn in Germany’s energy manufacturing sector, while the construction sector was also hit.
Growing competition from China, once a reliable destination for “made in Germany” products, as well as aggressive interest rate hikes in the eurozone to tame inflation, have further added to Germany’s woes.
The weak economic performance was widely expected, with the International Monetary Fund predicting that Germany will be the only major advanced economy not to grow in 2023.
If confirmed in the final figures, the contraction in 2023 makes it Germany’s weakest year since the coronavirus pandemic hit the economy in 2020.
“Despite recent price declines, prices remained high at all stages of the economic process and put a drag on economic growth” in 2023, Brand said.
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“Adverse financing conditions due to rising interest rates and weaker domestic and external demand also weighed on them.”
Uncertain outlook
A modest recovery is expected to begin in 2024, with Germany’s central bank, the Bundesbank, recently forecasting growth of 0.4%.
“We see a silver lining for the economy in 2024,” said KfW chief economist Fritzi Koehler-Geib.
“Thanks to strong real wage growth, private consumption in particular is likely to pick up again. Along with the expected recovery in export demand, gross domestic product is likely to increase,” he added.
But ING Bank economist Carsten Brzeski was less sanguine, pointing to fresh uncertainty stemming from the German government’s recent budget shake-up and shipping delays in the Suez Canal as a result of the Middle East conflict.
“Looking ahead, at least in the early months of 2024, many of the recent growth slowdowns will persist and, in some cases, have an even stronger impact than in 2023,” Brzeski said.
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He predicted that gross domestic product would contract again this year, “the first time since the early 2000s that Germany will go through a two-year recession, although it could prove to be shallow.”
Concerns about slowing exports and a downturn in the critical manufacturing sector, combined with a chronic shortage of skilled labor, have begun to fuel fears of “de-industrialization” in Germany.
The government of Chancellor Olaf Solz, whose popularity is falling in opinion polls, has sought to address these concerns with pledges to invest heavily in a green energy transition and modernizing infrastructure.
But a shock court ruling late last year blew a multibillion-euro hole in the government’s budget, upending its spending plans and leaving Scholz and his coalition partners scrambling to find savings.
Anger over Berlin’s proposal to cut some agricultural subsidies prompted farmers to stage tractor blockades across the country last week, culminating in a large demonstration in Berlin on Monday.
Source: AFP