Chancellor Olaf Scholz (SPD, rl), Robert Habeck (Alliance 90/The Greens), Minister of Economic Affairs and Climate Protection, and Christian Lindner (FDP), Minister of Finance, follow the debate at the start of the budget week.
Michaël Kappeler | Photo Alliance | Getty Images
There was little good news for the German economy. And the latest economic data hasn't changed much.
A few key data points for 2023, namely factory orders, exports and industrial production, were announced last week, pointing to a weak end to the year, with questions about Germany as the 'sick man of Europe' resurfacing.
“The data confirms that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.
Industrial production fell 1.6% month-on-month in December and fell 1.5% overall in 2023 compared to the previous year. Exports – a key cornerstone of the German economy – fell by 4.6% in December and by 1.4% for the year, or 1.562 trillion euros.
Meanwhile, factory orders figures looked promising at first glance, as they reflected an 8.9% increase in December compared to November.
But this growth “is not much cause for comfort,” Franziska Palmas, senior Europe economist at Capital Economics, told CNBC, explaining that this is due to several large-scale orders, which tend to be volatile. “Orders excluding large-scale orders actually fell to a post-pandemic low,” she added.
For 2023, factory orders fell by 5.9% compared to the previous year.
While these 'hard' figures from December do not yet indicate that a recovery is in sight, the latest Purchasing Managers' Index report indicates that the worst in the manufacturing sector may soon be over, Schmieding said.
“Although the reading at 45.5 is still below the 50 line that separates growth from contraction, the price rose to an eleven-month high,” he noted.
Still, economic growth is unlikely to be imminent, Erik-Jan van Harn, macro strategist for global economics and markets at Rabobank, told CNBC.
“We are nowhere near the kind of activity in German industry that we saw before the pandemic,” he explained. “We still expect a modest contraction in the first quarter, but this will probably be less severe than in the fourth quarter,” Van Harn said. He then expects growth to pick up slightly, but sees growth for the entire year as flat.
Others are even more pessimistic about the German economy.
“We maintain our forecast that the German economy as a whole will contract by 0.3% in 2024,” Commerzbank chief economist Jörg Krämer told CNBC.
This would be broadly in line with how the German economy did in 2023, when it shrank by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline in gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, characterized by two consecutive quarters of negative growth.
This is because the statistics agency has determined that there was stagnation instead of contraction in the third quarter of 2023. But if the economy shrinks as expected in the first three months of 2024, Germany would indeed enter a recession.
“Companies simply have too much to digest – global interest rate increases, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explains, highlighting the reasons for the downturn.
Some of these headwinds could also play a key role in weakening export figures, Rabobank's Van Harn points out. Factors such as cheap energy from Russia, strong demand from China and rising global trade have supported German exports for decades, “but are now faltering,” he said.
Looking beyond purely economic, national and international politics could also pose a risk to the country's economy, experts say.
Germany's coalition government is under pressure after facing a budget crisis following a constitutional court decision that the reallocation of unspent debt incurred during the pandemic to current budget plans is illegal.
This left a €60 billion hole in the coalition's budget plans, and as funds were allocated for future years, the crisis is likely to resurface at the end of the year when 2025 budget planning begins.
Voter satisfaction with the government is also low, with the opposition CDU currently leading in the polls and followed in second place by Germany's far-right party, the AfD. However, support for the latter has waned in recent weeks as protests against the far-right swept the country, with hundreds of thousands of Germans taking to the streets.
Elsewhere, the US election could also make things more difficult, Schmieding suggested.
“Trump's trade war threats could have a significant negative impact on Germany,” he said – but this obviously depends on the outcome of the election, and may not unfold in full force until 2025, he noted.