Germany stuck in longest recession in decades

Germany's struggling economy shrank for a second year in a row in 2024, the lengthiest recession for Europe's largest economy in more than two decades, reported dpa.

German gross domestic product (GDP) declined by 0.2% compared to the previous year, according to preliminary data released on Wednesday by the Federal Statistical Office.

The country's economy also contracted by 0.3% in 2023.

"The German economy is unlikely to emerge from stagnation this year either, unless economic policy reforms are implemented soon to get problems under control," said Timo Wollmershäuser, head of economic research at the Munich-based ifo Institute.

After adjusting for inflation, Germany's GDP is now only slightly higher than in 2019, the year before the coronavirus pandemic, Wollmershäuser noted. Germany has not gone that long without meaningful growth since the end of Word War II in 1945.

"Germany is going through by far the longest phase of stagnation in post-war history," he said.

The head of the Federal Statistical Office, Ruth Brand, said at a press conference in Berlin that structural problems and economic headwinds throttled growth in Germany in 2024.

"These include increasing competition for the German export industry in important sales markets, high energy costs, persistently high interest rates and an uncertain economic outlook," Brand said.

Preliminary fourth-quarter data, also released on Wednesday, showed that the economy shrank over those three months by 0.1% compared to the previous quarter, after adjusting for price, seasonal and calendar effects.

A significant upturn is not in sight, as many economists expect only very slight growth in 2025.

Economic struggles shaping politics

Anxiety over Germany's economic future has been a central theme in the political campaigns ahead of early nationwide elections on February 23.

Germany has struggled in recent years with high energy costs, a period of high inflation and weak consumer demand. Several key industries, such as the chemicals and automotive sectors, have seen lay-offs and other cost-cutting measures at a number of major firms.

A downturn in global demand for German-made products has also dragged down the economy, which is more heavily geared toward manufacturing and exports than in many other wealthy countries.

The slump has prompted fears that the country's industrial base could be falling into decline amid fierce global competition.

Forecasts for 2025 lowered

German industry groups have expressed hope that the results of the upcoming elections could break political deadlock in Berlin and bring economic reforms. But coalition talks could drag on for months, and economists warned any boost from reforms may not be felt for some time.

"Positive economic impetus from a new federal government would probably not take full effect until 2026 at the earliest," said economist Nils Jannsen from the Kiel Institute for the World Economy (IfW Kiel).

US President-elect Donald Trump's inauguration next week has also brought worries of higher tariffs and other trade barriers that could harm German exporters.

Economists fear trade conflicts between the United States and the European Union, which could respond with countermeasures.

No other G7 industrialized country is as dependent on exports as Germany, said Thomas Gitzel, chief economist at VP Bank.

"With new US punitive tariffs, the wind could still blow hard in the face of foreign trade in 2025," Gitzel said.

It remains unclear, however, to what extent Trump will implement his threats.

Germany's central bank, the Bundesbank, has already lowered its forecast for the economy and only expects very modest growth of 0.2% for 2025.

The German Council of Economic Experts, a panel of leading economists who advise the government, expect growth of 0.4%.

Falling behind globally

"Compared to other locations worldwide, the burdens on companies due to taxes, bureaucracy and energy costs are high, the rebuilding of digital, energy and transport infrastructure is progressing more slowly and the shortage of skilled workers is more pronounced," said the ifo Institute's Wollmershäuser.

Key German industries are losing global competitiveness, while Chinese competitors have caught up in sectors such as car manufacturing, he said.

Although the global economy has not been strong, Germany's continued recession makes it an outlier and mean the country is falling behind peers, said the IfW's Jannsen.

"In the rest of the eurozone, gross domestic product is likely to have risen by around 1%, and in the United States by almost 3%."

Parts of the business community once again see Germany as the "sick man of Europe," a term applied to the country in the late 1990s and early 2000s during a period of stagnation and high unemployment.

The answer back then was a series of labour market and social welfare reforms, dubbed the Agenda 2010, under then-chancellor Gerhard Schröder.

Today, business and industry leaders are demanding a reduction in government bureaucracy, tax relief, steps to lower energy costs and more speed on infrastructure projects.

Unemployment steady, but workers nervous

Unlike then, however, the labour market is largely stable. In 2024, the number of people in employment rose to a record 46.1 million.

However, new jobs were mainly created in state-dominated sectors such as health care, education and the public sector, while jobs were lost in construction and industry.

Concerns about job security have also pushed Germans to save more and spend less, holding down household spending that some economists had hoped might drive an economic rebound.

Germany's already high average household savings rate rose again significantly in 2014 to 11.6%, while inflation-adjusted consumer spending grew by only 0.3% despite an increase in real wages.

Struggling industry

Last year, Germany's industrial producers in particular faced difficulties, with gross value added shrinking significantly by 3% compared to the previous year.

Important sectors such as mechanical engineering and car manufacturing produced significantly less, while production in the energy-intensive chemical and metal industries remained at a low level.

Investments in equipment such as machinery, appliances and vehicles fell sharply by 5.5% compared to the previous year, while the construction industry continued to face a crisis, particularly in residential homebuilding.

Foreign trade also weakened. Exports of goods and services shrank by 0.8%, driven in particularly by a drop in demand for German machinery and cars.

The wave of inflation that followed the end of the coronavirus pandemic and the start of Russia's full-scale invasion of Ukraine in February 2022 has subsided.

Last year, the inflation rate in Germany fell to 2.2% on average, down from 5.9% in 2023.

(By Alexander Sturm and Bryn Stole, dpa)