Germany’s economy shrinks for second year in a row

Preliminary official figures released Wednesday show that gross domestic product shrank by 0.2 per cent in 2024, following a 0.3 per cent decline in 2023. The economy is now just 0.3 per cent larger than it was in 2019, prior to the Covid-19 pandemic.

German businesses have faced a combination of external shocks and internal challenges, fueling a national debate on how to reverse the downward trajectory. Chancellor Olaf Scholz’s coalition government collapsed in November after he dismissed the finance minister over disagreements on economic revitalization, setting the stage for early elections on February 23.

Candidates vying to lead the next government have presented differing plans to stimulate growth.

According to a report by Reuters, Ruth Brand, head of the statistics office, highlighted the challenges, citing “higher energy prices after the loss of cheap natural gas from Russia; high interest rates from the European Central Bank that deter investment in new machinery and vehicles; and consumers worried about the future who are saving their wages instead of spending them.”

Key economic indicators revealed weak consumer spending: expenditures on hotels and restaurants dropped 4.4 per cent, while spending on clothing and shoes declined by 2.8 per cent, despite rising disposable income. Meanwhile, exports, traditionally a strength of the German economy, have struggled.

“German exports saw themselves exposed to stronger international competition, not least from the People’s Republic of China. German exports shrank although world trade increased in 2024,” Brand was quoted by Reuters as  saying.

Despite the weak growth figures, the labor market remains robust, with rising pay agreements to offset inflation. However, economic uncertainty persists, driven by job cuts at major companies like Volkswagen, Thyssenkrupp, and Bosch, as well as the ongoing war in Ukraine.

Brand also indicated that the economy likely shrank by 0.1 per cent in the fourth quarter, though this estimate remains tentative as December data are yet to be finalised.

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