Positive developments have been scarce for the German economy. The most recent economic indicators haven’t altered this trend significantly.
Several significant statistics from 2023, including factory orders, exports, and industrial production, were released last week, indicating a lackluster end to the year.
This has reignited concerns about Germany being dubbed the “sick man of Europe.” “The data confirm that German industry is still in recession,” remarked Holger Schmieding, chief economist at Berenberg Bank.
In December, industrial production saw a 1.6% decline monthly, contributing to an overall 1.5% decrease in 2023 compared to the previous year.
Similarly, exports, a crucial pillar of the German economy, experienced a notable downturn, dropping by 4.6% in December and 1.4% for the entirety of 2023, amounting to 1.562 trillion euros ($1.68 trillion).
Although the factory orders data initially appeared promising with an 8.9% increase in December compared to November, analysts like Franziska Palmas, senior Europe economist at Capital Economics, cautioned against optimism.
Palmas pointed out that this growth is largely attributable to a few large-scale orders, which are inherently volatile. “Orders excluding large-scale orders fell to a post-pandemic low,” she noted.
Factory orders for 2023 declined by 5.9% compared to the previous year, highlighting ongoing challenges for the German economy.
“While still below the 50 lines indicating growth, the index rose to an 11-month high at 45.5,” he remarked.
Despite this uptick, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, expressed skepticism about the prospects of immediate economic growth.
“We’re still far from the levels of activity in the German industry before the pandemic,” he elaborated. “We anticipate a slight contraction in Q1, although less severe than in Q4 of 2023,” van Harn stated.
He anticipates a marginal increase in growth afterward but expects overall growth for the year to remain stagnant.
Some hold an even bleaker outlook for the German economy.
“We maintain our forecast that the German economy will contract by 0.3% in 2024,” stated Jörg Krämer, Chief Economist at Commerzbank, in an interview.
This projection aligns closely with Germany’s economic performance in 2023, during which it experienced a 0.3% year-on-year contraction, as indicated by data from the Federal Statistics Office released last month.
Despite a 0.3% decline in GDP in the fourth quarter, Germany avoided entering a technical recession, defined by two consecutive quarters of negative growth.
This was attributed to the statistics office’s determination that the third quarter of 2023 saw stagnation rather than contraction. However, if the economy contracts as anticipated in the first three months of 2024, Germany will indeed slip into a recession.
Krämer cited various factors contributing to the downturn, including global interest rate hikes, high energy costs, reduced support from China, and a decline in Germany’s attractiveness as a business hub.
Additionally, Erik-Jan van Harn of Rabobank highlighted how some of these challenges could impact export figures.
Factors such as inexpensive energy from Russia, diminished demand from China, and a slowdown in global trade, which historically buoyed Germany’s exports, are now faltering.
Furthermore, experts warn that both domestic and international political factors could pose risks to the country’s economy.
Germany’s coalition government has faced significant pressure due to a budget crisis triggered by a ruling from the constitutional court. The court deemed the reallocation of unused debt, incurred during the pandemic, to current budget plans as unlawful.
This decision has resulted in a substantial 60-billion-euro deficit in the coalition’s budget projections. Given that these funds were earmarked for years to come, the crisis is likely to resurface at the end of the year during the commencement of 2025 budget planning.
Public satisfaction with the government is also notably low, with the opposition CDU party currently leading in the polls. Following closely in second place is Germany’s far-right party, the AfD.
However, support for the AfD has waned in recent weeks amidst widespread protests against far-right ideologies across the country, with hundreds of thousands of Germans participating in demonstrations.
Moreover, external factors such as the U.S. election could further complicate matters, as suggested by Schmieding.
He emphasized that “Trade war threats by Trump could be a significant negative for Germany”. However, the extent of this impact would depend on the election outcome and might not fully materialize until 2025.
