Europe’s biggest economy shrank last year. The outlook isn’t much better

By Hanna Ziady, CNN

London (CNN) — Germany’s economy shrank last year for the first time since the onset of the Covid-19 pandemic, official data showed Monday, increasing the risk of an economic contraction in the wider euro area.

Gross domestic product was 0.3% lower in 2023 than in the previous year, according to Germany’s Federal Statistical Office (Destatis).

“Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises,” Destatis president Ruth Brand said in a statement.

Although inflation has eased, prices remain high throughout the economy and have put a damper on economic growth, she added. “Rising interest rates and weaker domestic and foreign demand also took their toll.”

GDP in the fourth quarter also fell by 0.3% compared with the previous quarter, according to a preliminary estimate from the statistics office. That followed a period of stagnation in the three-month period to the end of September, which means Germany very narrowly avoided a recession in the second half of the year, defined as two consecutive quarters of falling GDP.

The data bodes ill for the entire area that uses the euro because Germany is the largest of its 20 economies.

A survey published Monday by the World Economic Forum to coincide with its annual meeting in Davos, Switzerland, showed that more than three-quarters of economists expect “weak or very weak growth” in Europe in 2024.

And more than half of all economists, surveyed between November and December, expect the global economy to weaken this year.

WEF managing director Saadia Zahidi said the survey “highlights the precarious nature of the current economic environment.”

The euro area is a case in point: output there shrank slightly in the third quarter of 2023. Figures for the final quarter, expected January 30, will confirm whether the region slipped into recession toward the end of the year.

Widespread weakness

The decline in German GDP reflects weakness across the economy, but particularly in the country’s vast manufacturing sector, which has been hurt by faltering Chinese demand, high energy costs and painful interest rate hikes.

Within that sector, car production and the manufacture of other transport equipment recorded growth last year, but output fell in the energy-intensive chemical and metal industries. Overall, industrial production, dominated by manufacturing, contracted 2%, according to Destatis. Exports declined 1.8%.

Household and government spending also fell, the latter for the first time in almost 20 years. “This was primarily due to the discontinuation of state-financed Covid-19 measures, such as vaccinations and compensation paid to hospitals for free beds,” Destatis said.

After finishing 2023 going backward, Europe’s biggest economy has got off to a bumpy start this year, with a three-day national rail strike over pay and working hours causing travel chaos last week. The disruption was exacerbated by farmers, who blocked highways and other roads to protest government plans to cut fuel subsidies.

Farmers gathered for a final demonstration in Berlin Monday in a rally organized together with the German trucking industry.

Government spending cuts will weigh on Germany’s economic growth this year, according to Andrew Kenningham, chief Europe economist at Capital Economics.

“The recessionary conditions which have been dragging on since the end of 2022 look set to continue,” he wrote in a note Monday. “We forecast zero GDP growth in 2024.”

One silver lining in the German economic data was employment, which grew by a record 0.7%, or 333,000 people, compared with 2022, taking the total number of people in work to 45.9 million. According to Destatis, foreign workers and more of the domestic population joining the labor force were behind the increase. This “more than offset the dampening effects” of Germany’s aging population, the statistics office said.

Stephanie Halasz contributed reporting.

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