Germany experienced a 0.3% year-on-year contraction in its economy in 2023, attributed to high inflation and firm interest rates, as reported by the Federal Statistical Office of Germany on Monday. Analysts’ expectations were met, with a slight improvement to a 0.1% decline when adjusted for calendar purposes.
Ruth Brand, the president of the federal statistics office, noted, “The overall economic development in Germany stalled in 2023 in the still crisis-ridden environment.” Brand highlighted persistently high prices across the economy, coupled with unfavorable financing conditions due to rising interest rates and decreased demand domestically and internationally.
In December, German inflation rose to 3.8% year-on-year on a harmonized basis, leading the European Central Bank to maintain unchanged interest rates for the second consecutive time. The manufacturing sector, excluding construction, witnessed a sharp 2% decline, primarily driven by reduced production in the energy supply sector. Weak domestic demand and subdued global economic dynamics hindered foreign trade, resulting in a 1.8% drop in imports, outpacing the decline in exports.
Household consumption contracted by 0.8%, and government expenses slimmed by 1.7%. The fourth quarter mirrored a 0.3% drop compared to the July-September period, narrowly averting a technical recession defined by two consecutive quarters of GDP decline.
Early indicators suggested a slow economic recovery for Germany, according to a German economy ministry report. Capital Economics predicted continued challenges for Germany, forecasting zero GDP growth in 2024. Chief Europe Economist Andrew Kenningham cited ongoing recessionary conditions, potential contractions in residential and business investment, a downturn in construction, and a sharp fiscal policy tightening.
Despite facing economic challenges throughout the previous year, including disruptions in Russian energy supplies, Germany managed to weather the storms. The country had been dubbed the “sick man” of Europe, with analysts initially predicting it to be the only major European economy to contract in 2023.
Germany grappled with a budgetary crisis towards the end of the year due to a constitutional court ruling on national borrowing restrictions. The national debt brake, enshrined in Germany’s constitution, became a contentious issue in national politics. To address the situation, the German government suspended the borrowing limit and secured a budget deal, aiming to save 17 billion euros ($18.6 billion) through measures such as ending climate-damaging subsidies and implementing cost-cutting initiatives.
