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German output contracted by 0.3 percent last year as rising inflation, rising interest rates and rising energy costs made Europe’s largest economy one of the world’s weakest performers, according to preliminary estimates released on Monday.
The German economy’s decline in 2023 exacerbates what has been a bleak start to the year for the country, which has been hit by nationwide train strikes over working hours and disruptive protests by farmers against fuel subsidy cuts.
“Germany’s overall economic development faltered in 2023 in an environment still characterized by multiple crises,” said Ruth Brand, head of the Federal Statistical Office.
GDP remains above pre-pandemic levels after last year’s contraction followed two years of output recovery leaving it 0.7 percent higher than in 2019, the statistics office said.
Combined with separate data published on Monday that showed industrial production in the euro zone falling for a third straight month in November, economists said the German figures pointed to a potential contraction in the broader single currency bloc in the fourth quarter.
Melanie Debono, an economist at consultancy Pantheon Macroeconomics, said risks to her forecast of a 0.1 percent contraction of the euro zone economy in the final quarter of last year were “directly on the downside.”
Germany was the world’s worst-performing major economy last year, according to the International Monetary Fund, which recently forecast that advanced economies would grow by 1.5 percent on average in 2023, while emerging market and developing economies expanded by 4 percent.
The International Monetary Fund expected the US economy to grow by 2.1 percent last year, while the euro zone expanded by 0.7 percent and the United Kingdom by 0.5 percent. This highlights how Germany’s large, export-focused manufacturing sector has been hit by the loss of cheap Russian energy and slowing demand from China.
A drop in German and Italian factory output contributed to a 0.3 percent drop in euro zone industrial production in November from the previous month, according to EU data released on Monday, bringing the annual decline to 6.8 percent.
The German statistics office said German GDP fell by 0.3 percent in the last three months of last year compared to the previous quarter when production stagnated. But she added that because “the data basis for this estimate is less complete than the normal quarterly calculation, there is a higher degree of uncertainty.”
Retail sales, exports and industrial production in Germany fell last year. Households have been hit by the biggest rise in the cost of living in a generation, while the country’s sprawling manufacturing sector has suffered from rising energy costs, weak global demand and rising financing costs.
The ONS said household consumption fell by 0.8 per cent last year, leaving it 1.5 per cent below pre-pandemic levels. The industry’s gross value added, excluding construction, contracted by 2 percent last year. Government spending fell by 1.7 percent with the gradual cancellation of pandemic-related measures.
The country’s growth is expected to rise to 0.6 percent this year, according to the Organization for Economic Cooperation and Development, which will make it one of the weakest large economies in the world. Many analysts have lowered their forecasts since the government cut spending plans to address a 60 billion euro gap in its budget, left by a Constitutional Court ruling against off-balance sheet funds.
“It appears that recessionary conditions, which have persisted since the end of 2022, will continue this year,” said Andrew Kenningham, an economist at consultancy Capital Economics, predicting zero growth for German GDP in 2024.
Economists expect consumer spending in Germany to rise this year as household purchasing power recovers, thanks to continued strong wage growth and slowing inflation rates.
German inflation fell from more than 11 percent in late 2022 to 2.3 percent last November. However, consumer prices are still 20 percent higher than before the pandemic, and inflation rose to 3.8 percent in December after the government phased out energy subsidies.
“Despite recent price declines, prices have remained high throughout the economic process and have hampered economic growth,” Brand said.
The increase in borrowing costs to their highest level in more than a decade – after the European Central Bank raised its deposit rate to 4 percent to tackle inflation – has crimped industry demand and sparked a 10 percent drop in German house prices.
“Unfavorable financing conditions due to high interest rates and weak domestic and foreign demand also impacted,” Brand said.
There was better news from euro zone trade data for November, which showed the bloc’s exports rose 1 percent from the previous month, while imports fell 0.6 percent. However, compared to the previous year, euro area exports remained down by 4.7 percent, while imports fell by 16.7 percent, reflecting lower prices for energy and food imports.