German Chancellor Olaf Scholz arrives for the federal government's weekly cabinet meeting on October 11, 2023 in Berlin, Germany.
Michele Tantussi | Getty Images News | Getty Images
Europe's largest economy shrank by an annualized 0.3% in 2023 as high inflation and firm interest rates fueled growth, Germany's Federal Statistical Office said on Monday.
The estimate is in line with the expectations of analysts polled by Reuters. The decline in economic output decreases to 0.1%, adjusted for calendar purposes.
“Germany's overall economic development came to a standstill in 2023 in the still crisis-ridden environment,” said Ruth Brand, chairman of the federal statistics office, according to a Google translation.
“Despite recent declines, prices remained high at all levels of the economy, compounded by unfavorable financing conditions due to rising interest rates and lower domestic and international demand,” Brand said.
German inflation rose by 3.8% year-on-year on a harmonized basis in December, the statistics office said on January 4. The European Central Bank opted in December to keep interest rates unchanged for the second time in a row, shifting the inflation outlook from “expected to remain too high for too long” to expecting it “to gradually decline over the course of next year.” valleys”.
The German manufacturing sector, excluding construction, fell by a sharp 2%, mainly due to lower production in the energy supply sector. Weak domestic demand last year and “moderate global economic dynamics” also suppressed foreign trade, despite a price decline. Imports fell by 1.8%, which fell more than exports and led to a positive trade balance.
Household consumption shrank by 0.8% year-on-year, adjusted for prices, while government spending fell by 1.7%.
The fourth quarter showed a similar decline of 0.3% compared to the July-September period. The agency said the German economy stagnated in the third quarter, implying the country narrowly avoided a technical recession defined by two straight quarters of consecutive GDP declines.
Early indicators do not suggest a rapid German economic recovery is on the horizon, a report from the German Economics Ministry warned on Monday, according to Reuters.
Capital Economics also expects that Germany's problems are not over yet and predicts no growth for the country in 2024.
“The recession that has been dragging on since late 2022 looks set to continue this year,” chief economist Andrew Kenningham said in a note. “Granted, the recent decline in inflation should provide some relief to households, but residential and business investment is likely to contract, construction is heading for a sharp downturn and the government is sharply tightening fiscal policy. We forecast zero GDP growth in 2024.”
Germany spent most of last year dogged by its nickname as the “sick man” of Europe, despite weathering the shock of losing access to some sanctioned Russian energy supplies in the wake of Moscow's invasion of Ukraine. Analysts had predicted that Germany would be the only major European economy to shrink last year.
The German economy faced a deep budget crisis late last year after a constitutional court ruling on national borrowing limits threatened a 17 billion euro hole in the country's 2024 spending plans.
The debt brake, enshrined in the German constitution, limits the federal deficit to 0.35% of GDP, barring emergencies, and became a major point of contention in national politics last year. The German government agreed to suspend borrowing limits after the constitutional court blocked attempts to reuse leftover emergency funds initially allocated to tackle the Covid-19 pandemic.
Weeks of negotiations have produced a budget deal that maintains debt limits until 2024, with the government expecting to save 17 billion euros ($18.6 billion) from its core budget by ending climate-damaging subsidies and implementing cost cuts, the three-way panel said German Chancellor Olaf Scholz. coalition announced in mid-December.
