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Crises, wars, slumping consumption: The German economy also shrank in the fourth quarter and is therefore in recession. Can consumers and businesses hope for a recovery in the new year?
Economic performance in Germany fell last year. According to an initial estimate by the Federal Statistical Office in Wiesbaden, the gross domestic product (GDP) fell by 0.3 percent in 2023 compared to the previous year. A year earlier, according to the latest calculations, there had been 1.9 percent growth.
How did things go in each quarter?
Economic performance in Germany stagnated in the first quarter, but there was mini-growth of 0.1 percent in the second quarter. In the third quarter, GDP in Europe’s largest economy fell by 0.1 percent compared to the previous quarter. According to an initial estimate by statisticians, economic output ultimately shrank by 0.3 percent in the final quarter.
What is a Recession?
Economists speak of a “technical recession” when there are two consecutive quarters of shrinking economic output. In the third quarter of 2023, gross domestic product fell by 0.1 percent. Together with the 0.3 percent decline in GDP in the fourth quarter, this results in a recession.
Why is the German economy shrinking?
According to experts, the sluggish global economy, as well as consumers’ reluctance to consume as a result of high inflation rates, are primarily responsible for the weak German economy. “The German economy has been in an almost constant crisis mode for almost four years,” states the Hamburg World Economic Institute (HWWI). The Corona crisis was followed by the Russian attack on Ukraine in February 2022, which temporarily caused energy and food prices to rise dramatically. The Middle East conflict is causing new uncertainty, and the recent budget crisis is hitting Germany at a time of economic weakness.
Where are things going particularly badly for Germany’s economy at the moment?
It is not for nothing that industry is considered the engine of the German economy, as it contributes just over a quarter of the country’s gross domestic product. But this engine sputters badly. Industrial production fell for the sixth month in a row in November. The last time there was a similarly long negative series was in 2008 during the financial crisis. Almost four years after the start of the corona pandemic, production is more than nine percent below the previous level, calculates ING chief economist Carsten Brzeski.
Is there hope for a recovery in 2024?
Economists are skeptical; they point to the high inflation that is weighing on consumption; increased interest rates are slowing down the construction industry and investments, while the global economy continues to weaken. Commerzbank chief economist Jörg Krämer expects gross domestic product to decline by 0.3 percent in 2024. The Institute for Macroeconomics and Business Cycle Research (IMK) shares this assessment. According to ifo President Clemens Fuest, Germany’s economic prospects for 2024 are “rather modest”: “In our estimation, economic growth will end up somewhere between zero and one percent. If things go badly, it can also slip into negative territory.”
What role does monetary policy play in this?
Higher interest rates mean higher financing costs for companies, which dampens investments. The construction industry is also being slowed down by rising building interest rates. The European Central Bank (ECB) left the key interest rate unchanged at 4.5 percent in December for the second time in a row. This was preceded by ten interest rate increases. Experts expect the first key interest rate cut during the course of the year, but are still divided about the exact timing.
What consequences does that have? Budget judgment of Federal Constitutional Court?
The Karlsruhe ruling of November 15th is forcing the traffic light coalition to make savings. Uncertainties and resistance are great – see the recent farmers’ protests. The state is becoming “a brake on the economy,” writes the HWWI with a view to 2024: “The reduced funding opportunities from the state, in particular the lack of funds in the climate and transformation fund, are likely to have a dampening effect on companies’ willingness to invest in the areas affected by this and strengthen location considerations.”
Last year, the German state once again spent more money than it earned. According to the Federal Statistical Office, the federal, state, local and social security deficits in relation to overall economic output were 2.0 percent in 2023.
With information from Angela Göpfert, ARD financial editorial team.