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When Germany sneezes, the euro zone catches a cold

Europe’s powerhouse economy may already be in a recession, Bundesbank says

Germany's chancellor Olaf Scholz (centre), minister for economy and climate Robert Habeck (right) and minister for finance Christian Lindner (left) are under pressure as the country's economy struggles

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Cantillon
Tue Feb 20 2024 - 06:00

When the US economy sneezes, the rest of the world catches a cold, or so the saying goes. The same could be said of the German economy and the euro zone. Germany’s sheer size and economic strength makes it a bellwether for the European economy.

That’s why the Bundesbank’s latest monthly report card on Germany’s economy is eyed with more than just passing interest.

The Frankfurt-based central bank said while the German economy may already be in a recession right now with output falling for a second consecutive quarter, a severe downturn wasn’t likely.

“There is still no recovery for the German economy,” the Bundesbank said. “Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.

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“A recession in the sense of a significant, broad-based and prolonged decline in economic output cannot be identified and is currently not expected.”

Europe’s powerhouse economy shrank last year as its outsize manufacturing sector suffered from a lingering energy shock and weak global demand. Germany’s weakness is weighing on the euro area as a whole.

Germany’s economy contracted by 0.3 per cent in both the fourth quarter and over the whole of 2023, making it the worst-performing major economy in the world last year.

While the Bundesbank said Germany was facing ongoing challenges, it warned against too much pessimism.

“In particular, the income situation and thus the consumption of private households should continue to improve in the future against the backdrop of a stable labour market, strongly rising wages and a declining inflation rate,” it said.

The weak performance has triggered questions of Germany’s economic strategy but the government in Berlin insists it is merely a perfect storm of high energy costs, weak Chinese demand and rapid inflation that is temporarily retarding growth.

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