Germany’s Economy Shrinks for Second Consecutive Year as Challenges Persist
Germany’s economy contracted by 0.2% in 2024, marking its second consecutive annual slowdown, according to data released by the country’s statistics office, Destatis.
This decline aligns with economists’ expectations, as recent reports had anticipated a minor dip in the nation’s Gross Domestic Product (GDP). In 2023, the economy had already contracted by 0.3%, and the ongoing downturn underscores the persistent economic struggles facing Europe’s largest economy.
Germany has been contending with multiple economic challenges, including a long-standing housing crisis, pressures on key industries like automobiles, and the lingering effects of the energy crisis exacerbated by the Russian invasion of Ukraine. The manufacturing and construction sectors, which are central to the economy, have experienced notable downturns. Specifically, the construction industry has been significantly impacted by high interest rates and rising costs, while the automotive sector faces mounting competition, particularly from electric vehicles produced by China.
Despite these challenges, the services sector has shown some growth over the period. However, according to Ruth Brand, president of Destatis, “cyclical and structural pressures” continue to hinder stronger economic development. These pressures include increased competition for German exports, high energy costs, and an uncertain economic outlook.
Looking into the fourth quarter of 2024, preliminary data suggests a 0.1% contraction compared to the previous quarter. This slight downturn raised concerns among economists about the lack of momentum at the start of winter. Robin Winkler, chief Germany economist at Deutsche Bank, noted that if this trend is confirmed, it could signal further economic weakness in the short term.
The economic difficulties come at a time when Germany is facing political uncertainty. Chancellor Olaf Scholz’s coalition government collapsed in November 2024, partly due to disagreements over the country’s fiscal policy, specifically regarding the “debt brake” mechanism that limits state borrowing. With snap elections scheduled for February 2025, economic reform has become a central issue in the political debate. Analysts, such as Carsten Brzeski from ING Bank, suggest that a new government must prioritize long-term policy changes to address the country’s stagnation and invest in key sectors such as infrastructure and renewable energy.
The Ifo Institute for Economic Research has warned that without significant policy reforms, Germany’s economy could remain stagnant through 2025, with modest growth projected at just 0.4%. However, the institute also noted that with the right measures, growth could accelerate to 1%.
CNBC, the New York Times, Bloomberg, and Deutsche Welle contributed to this report.