The German economy continues to shrink

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Lerato Khumalo

Germany’s economy shrank for the second year in a row last year, as increased competition with China and structural problems put the brakes on the economy.

The German Federal Statistical Office (Destatis) announced the leading growth data for the German economy covering 2024.

Accordingly, the gross domestic product (GDP) in Germany, adjusted for seasonal and calendar effects, contracted by 0.1 percent in the last quarter of last year compared to the previous quarter, and decreased by 0.2 percent compared to the previous year in the whole of 2024. Thus, the German economy, the world’s 3rd economy, experienced a contraction in 2024 after a 0.3 percent decrease in 2023.

The German economy last shrank for two consecutive years in 2002-2003.

Markets expected Europe’s largest economy to shrink by 0.2 percent last year.

Destatis President Ruth Brand said at the press conference: “Cyclical and structural pressures prevented better economic development in 2024. These include increasing competition for the German export industry in key sales markets, high energy costs, the still high level of interest rates, as well as uncertain economic prospects. In this context, the German economy will contract once again in 2024.” he said.

“2024 WAS THE YEAR WHEN CONJUNCTURAL AND STRUCTURAL WINDS TURNED INTO A STORM”

ING Global Macro Research Head and Germany Chief Economist Carsten Brzeski also commented on the issue: “The German economy closed 2024 with another disappointment. 2024 was the year when cyclical and structural winds turned into a storm.” he said.

Brzeski stated that the German economy contracted for two consecutive years for the first time since the early 2000s and said:

“The early 2000s were the last period in which Germany received the title of ‘Sick Man of Europe’. History doesn’t repeat itself, but it rhymes. Destatis announced that the German economy shrank by 0.1 percent in the last quarter of last year compared to the previous quarter. Note that this estimate was calculated without concrete data for December. “Given the news that industrial companies suspended production in December due to rising energy prices, there is a risk that fourth quarter GDP data will be revised downwards.”

Stating that the German industry is the best example of the problems experienced by the entire economy in the last few years, Brzeski said, “The German industry is stuck between cyclical and structural winds and has finally realized that the old macro business model consisting of cheap energy and easily accessible large export markets no longer works. 10 years of insufficient investment, deteriorating competitiveness and China’s transformation from export destination to fierce industrial rival have harmed and will continue to harm the German economy.” he said.

Brzeski pointed out that a significant recovery in the German industry has not yet been seen, and emphasized that “when the upcoming customs duties and the modern version of the ‘beg your neighbor’ policies expected from the new administration of the USA are added, the outlook for the German industry is not encouraging at all.”

IF THE COUNTRY CONTRACTS IN THE FIRST QUARTER OF 2025, IT WILL ENTER A TECHNICAL RECESSION

Meanwhile, if the German economy, which shrank by 0.1 percent in the last quarter of last year, contracts in the first quarter of 2025, it will enter a technical recession, defined as two consecutive quarters of contraction.

Germany, whose economy shrank by 0.3 percent compared to the previous year in 2023 due to reasons such as unusually high inflation affecting purchasing power, high energy prices, falling investments, weak foreign demand and high interest rates, was the only country among the G7 countries to shrink.

Companies that form the backbone of Germany, Europe’s largest economy, are struggling to cope with harsh macroeconomic winds due to rising energy prices and the decline in foreign demand, which is a particular problem in the export-dependent German economy, and they also face heavy competition from Chinese companies.

While important sectors such as the automotive, mechanical engineering and chemical industries, as well as the construction sector, are struggling with low demand, Germany’s exports decreased by 0.8 percent in 2024 compared to the previous year. Private consumption expenditures increased by only 0.3 percent.

While expensive energy and excessive bureaucracy compared to other countries challenge Germany as an industrial country, Germans do not spend their money due to uncertainty. The old infrastructure in the country needs to be renewed.

While the Russia-Ukraine War adds political uncertainties to the German economic agenda, ranging from budget disputes, the early elections to be held on February 23 and the uncertainty of the future economic policy framework cause many companies to hesitate to invest.

In addition, last year’s stagnant economy also negatively affected the country’s public finances. The German government recorded higher new debt in 2024. The budget deficit covering the federal government, states and municipalities in Germany increased to approximately 108 billion euros in January-September 2024, due to the impact of increased spending and high interest rates.

A SIGNIFICANT RECOVERY IS NOT EXPECTED IN 2025

Stating that the weakness of the German economy has become chronic, economists do not expect the German economy to recover this year.

On December 13, the German Central Bank (Bundesbank) reduced its calendar-adjusted GDP growth forecast for this year from 1.1 percent to 0.2 percent due to threats arising from protectionism in trade, geopolitical conflicts and structural change.

The Organization for Economic Co-operation and Development (OECD) also expects the German economy to grow slower than all other industrialized countries in 2025.

In the German government’s latest report on the economy, “A significant economic recovery in Germany can only begin when a clear outlook on future economic, financial and geopolitical framework conditions emerges.” It was said.