The German economy, Europe's economic powerhouse, experiences a second consecutive year of contraction.
Germany's economic downturn, as revealed by the Federal Statistical Office, saw a 0.2% decrease in GDP last year. This followed a 0.3% contraction in 2023, marking the first time the economy shrank for two consecutive years since the early 2000s, when Germany grappled with high unemployment.
This gloomy economic outlook is approaching a significant snap election in Germany, called due to the collapse of the ruling coalition over disagreements about bolstering the economy. Economist Carsten Brzeski from ING Global expects a new German government to implement longer-term economic reforms and investments.
Volkswagen, Germany's largest manufacturer, exemplifies the nation's struggles with high labor costs, weak productivity growth, and competition from foreign markets, including China. The automaker announced significant changes, including over 35,000 job cuts and plans to relocate some production to Mexico.
Productivity in German industry remains approximately 10% below its pre-pandemic levels due to various factors, such as potential tariffs from the incoming US administration. The German central bank observed economic stagnation continuing this year, attributing a slow recovery to 2025.
The European economy has similarly struggled to grow considerably after the pandemic and faces increased fractiousness with one of its primary trading partners, the United States. Eurozone industrial production increased slightly in November but is still 9% below its seven-year-old levels.
Capital Economics highlighted the energy prices' role in this ongoing struggle, attributing the stagnation to Russia's conflict in Ukraine. The consultancy expects production to remain subdued in the upcoming months, with the German automobile sector's structural challenges persisting.
Enrichment Insights
Germany's economic downturn results from a mix of cyclical and structural factors. The main factors contributing to this downturn include:
- Structural Weaknesses: chronic underinvestment in public and private sectors, weakening private investment and competitiveness; loss of international competitiveness due to inadequate investments in infrastructure, education, and digital infrastructure; trade disruptions caused by China's industrial competitiveness.
- Cyclical Pressures: high inflation and interest rates tightening consumer spending and investment; policy uncertainty; increasing unemployment rates.
- Geopolitical Tensions: US trade policies, potential Russian oil and gas supply disruptions, and energy security concerns.
- Consumer Sentiment: high food and energy prices limiting household spending and consumption; record-high business insolvencies.
These factors have significant ramifications for the wider European economy, potentially causing ripples through markets, affecting trade balances, and threatening the economic stability of regions across the continent.
The upcoming snap election in Germany is being driven by the country's economic downturn, as the nation's GDP decreased by 0.2% last year and 0.3% in 2023. This unfavorable business climate has prompted even prominent companies like Volkswagen to announce significant changes, such as job cuts and the relocation of production to foreign markets.
Economist Carsten Brzeski from ING Global anticipates that a new German government will implement long-term economic reforms and investments to address these structural weaknesses in the business and economic landscape.
