Germany escapes recession at the end of 2023 but faces

Germany escapes recession at the end of 2023, but faces a prolonged slump –

Chancellor Olaf Scholz comes to Berlin for the weekly cabinet meeting of the federal government on October 11, 2023.

Michele Tantussi | Getty Images News | Getty Images

Europe's largest economy shrank 0.3% year-on-year in 2023 as high inflation and fixed interest rates hit growth, the Federal Statistical Office said on Monday.

The estimate is in line with the expectations of analysts polled by Portal. Adjusted for the calendar, the decline in economic output fell to 0.1%.

“The overall economic development in Germany has stalled in 2023 in the still crisis-ridden environment,” said Ruth Brand, President of the Federal Statistical Office, according to a Google translation.

“Despite recent declines, prices remained high at all levels of the economy. “In addition, there were unfavorable financing conditions due to rising interest rates and lower demand from home and abroad,” added Brand.

German inflation rose 3.8% year-on-year on a harmonized basis in December, the statistics office said on January 4. The European Central Bank decided to leave interest rates unchanged for the second consecutive day in December, changing its inflation outlook from “expected to remain too high for too long” to expecting it to “increase.” will gradually decline over the next year.”

Manufacturing in Germany (excluding construction) recorded a significant decline of 2%, reflecting lower production in the energy supply sector. Weak domestic demand last year and the “subdued global economic momentum” also slowed foreign trade despite falling prices. Imports fell by 1.8%, falling more sharply than exports, resulting in a positive trade balance.

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Private household consumption fell by 0.8% year-on-year in price-adjusted terms, while government spending fell by 1.7%.

The fourth quarter saw a similar decline of 0.3% compared to the July-September period. The office said the German economy stagnated in the third quarter, meaning the country narrowly avoided a technical recession characterized by two consecutive quarters of consecutive GDP declines.

According to a report published on Monday by the German Ministry of Economic Affairs, leading indicators do not suggest that the German economy is expected to recover quickly, according to Portal.

Capital Economics also assumes that the problems in Germany are not yet over and does not forecast any growth for the country in 2024.

“The recessionary conditions that have persisted since late 2022 are expected to continue this year,” Andrew Kenningham, chief economist for Europe, said in a note. “Admittedly, the recent decline in inflation should provide some relief to households, but investment in residential property and businesses is likely to decline, construction is facing a sharp downturn and the government is significantly tightening fiscal policy. We forecast zero GDP growth in 2024.”

Germany has been labeled Europe's “sick man” for much of the last year, even as the country weathered the shock of losing access to some sanctioned Russian energy supplies following Moscow's invasion of Ukraine. Analysts had predicted that Germany would be the only major European economy to contract last year.

The German economy was in a severe fiscal crisis late last year after a Constitutional Court ruling on national borrowing restrictions threatened a 17 billion euro gap in the country's 2024 spending plans.

The national debt brake, which is anchored in the Basic Law of the Federal Republic of Germany and limits the federal deficit to 0.35% of GDP outside of emergencies, became a major point of contention in federal politics last year. The federal government agreed to suspend the loan cap after the Constitutional Court blocked attempts to reallocate leftover emergency aid funds originally intended to combat the Covid-19 pandemic.

Weeks of negotiations resulted in a budget agreement that maintains debt restrictions until 2024. The government expects to save 17 billion euros ($18.6 billion) in its core budget by eliminating climate-damaging subsidies and implementing cost cuts, in keeping with Chancellor Olaf Scholz's triad coalition announced in mid-December.