Europe’s powerhouse economy, Germany, is struggling with a potent mix of short-term and deeper structural problems, and is now on track for its first two-year recession since the early 2000s, after its GDP shrank by 0.3 per cent in 2023. Experts describe the country’s stagnating economy as being in “permanent crisis mode” and warn it is a drag on wider EU growth.
Covid, support for Ukraine, weaker industrial demand, and an energy crisis have put huge strain on its divided and unpopular government’s promise to modernise and go green without harming individual sectors. Germany’s big export-focused manufacturers have been hit hard by the loss of cheap Russian energy and a slowdown in demand from China.
The IMF, which says Germany was the worst-performing major economy in the world last year, predicts it will be the only G7 economy to have shrunk in 2023. And with euro zone industrial production falling for the third consecutive month in November, economists warn that the German figures point to a likely contraction in the wider euro bloc in the fourth quarter.
Although growth in the country is expected to pick up to 0.6 per cent this year, according to the OECD, other forecasters have been forced to revise downwards their predictions since the German government slashed spending plans to address a €60 billion hole in its budget. This resulted from a constitutional court ruling that prevented it from diverting unspent borrowing left over from its pandemic emergency fund into a climate fund.
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The downturn has also exposed longer-term issues affecting the country’s economy, like the rapidly ageing population, lack of recent major investment in infrastructure and high corporate tax rates. Inflation is easing, but prices remain more than 20 per cent higher than before the pandemic. Consumer spending is on the wane. This has implications for German politics, of course, but also more widely for Europe, where Germany’s economy remains a dominant force.