Germany's economy shrank 0.3% last year
What's the story
Germany, the economic powerhouse of the eurozone, experienced its first economic contraction since the onset of the COVID-19 pandemic, according to official data released by Germany's Federal Statistical Office (Destatis) on Monday. Gross domestic product (GDP) for 2023 was 0.3% lower than the previous year. The decline raises concerns about the potential for an economic downturn in wider Europe.
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Germany narrowly avoids recession
GDP in Q4 of 2023 also fell by 0.3%, narrowly avoiding a recession in the second half of the year. A recession occurs when a country experiences two consecutive quarters of decline in its real (inflation-adjusted) GDP. While inflation has eased, high prices, rising interest rates, and weakened domestic and foreign demand continue to impede economic growth, according to Destatis president Ruth Brand.
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Weakness across the economy
The drop in Germany's GDP indicates a broader economic weakness, especially in its large manufacturing sector. Overall, industrial production, dominated by manufacturing, contracted 2%, according to Destatis. This sector is facing challenges from reduced demand in China, high energy costs, and significant interest rate hikes. Meanwhile, the service sector saw a sharp contraction in wholesale and retail trade.
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Bleak economic outlook for 2024
Chief economist (Europe) at Capital Economics, Andrew Kenningham, notes that the recessionary conditions persisting since the end of 2022 are likely to continue in 2024. Despite a recent fall in inflation providing relief for households, business investment is expected to contract, construction faces a steep downturn, and the government is tightening fiscal policy sharply. "We forecast zero GDP growth in 2024," he added.