German economy contracted in 2023

FRANKFURT – The German economy likely contracted in the final quarter of last year, the German statistics office said on Monday, during a press conference in Berlin as tractors descend on the capital in protest against new austerity measures facing farmers.

Gross domestic product fell 0.3 percent between October and December, the preliminary estimate showed, but an upward revision to the third quarter meant that Germany avoided a second straight quarter of contraction, the economist’s typical definition of a recession. However, for the full year, GDP is estimated to have shrunkby 0.3 percent from 2022.

Europe’s biggest economy looks set to remain among its weakest. The International Monetary Fund predicts Germany will be the only G7 economy that shrank in 2023. The IMF expects Germany to grow 0.9 percent this year, well below the 1.4 percent it predicts for advanced economies in general in 2024.

“The overall economic development in Germany stalled in 2023 in an environment that is still characterized by crises,” chief statistician Ruth Brand told a press conference.

Germany, which is heavily dependent on exports and on energy imports from Russia, was hit particularly hard by collapsing supply chains, falling global demand, and surging energy prices over the last three years. A massive surge in inflation and interest rates made things worse.

A constitutional court ruling in November that tore a gaping €17 billion hole in this year’s budget put the country off to a bad start in 2024, necessitating government cutbacks and tax hikes that have sparked stiff resistance from various interest groups. Industrial action over subsidies for farmers and a wage dispute in the public transport sector have brought the country to a near-standstill in the last week.

As statistician presented the data, tractors again gathered around the Brandenburg Gate, as farmers protestedplans to slash subsidies. The protests are the latest sign of dissatisfaction with Chancellor Olaf Scholz’s collation government, which has also been evidence in a marked rise in support for right-wing populist AfD Party.

’Dumb man of Europe’ falls to bottom of G7 growth league

Peter Bofinger, a former economic advisor to the government, took up the refrain in an op-ed last week that Germany may not only be the sick man but also the dumb man of Europe, as reining in spending now is anything but smart.

"The austerity package instead provided a negative fiscal impulse of around €30 billion. Although not comparable in scale, it is reminiscent of the pro-cyclical policy pursued by Heinrich Brüning as Chancellor between 1930 and 1932, which paved the way for National Socialism,” he wrote.

While this may sound dramatic, many argue that keeping the purse-strings tight will not allow Germany to rise to longer-term challenges, such as the creaking infrastructure, and the need to digitalize as its population ages rapidly.

For their part, Finance Minister Christian Lindner and Bundesbank President Joachim Nagel have dismissed suggestions that Germany is the ‘sick man of Europe’ and expect the economy to adapt.

Their forecasts, like the European Commission’s, expect Germany to start growing again in 2024, thanks to a recovery in global demand, and by a fall in inflation that will allow people to enjoy a rise in real wages.

Developments at the start of 2024 have suggested that any rebound may take time.

Global trade declined by 1.3 percent from November to December 2023 as militant attacks on container ships in the Red Sea hurt shipping, the Kiel Institute estimated on Thursday.

"This is also reflected in the declining trade figures for Germany and the EU,” its trade policy research chief Julian Hinz said.

In their press conference, Destatis officials said it was too early to say whether the troubles in the Red Sea already affected German growth at the end of last year. Business surveys such as Standard & Poor’s purchasing managers index point to an ongoing fall in activity.

“All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high,” said ING economist Carsten Brzeski. “It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.”

The Federal Statistical Office will publish the regular first estimate for GDP in the 4th quarter of 2023 on 30 January 2024.