Germany’s economy is on shaky ground and glimmers of hope are few and far between

Germany’s economy is on shaky ground and glimmers of hope are few and far between

  • Germany’s economy has been struggling and the latest data has provided little hope for improvement.
  • Economists say the worst may soon be over, but are still not hopeful about economic growth in 2024 and suggest the country may enter a technical recession this year.
  • Headwinds include a slowdown of global trade, higher energy prices, and national and international political uncertainty.

Good news has been sparse for the German economy. And the latest economic data has not done much to change this.

A few key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the “sick man of Europe” resurface.

“The data confirm that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.

Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.

Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.

But this growth “is not much reason for comfort,” Franziska Palmas, senior Europe economist at Capital Economics told CNBC, explaining that it is thanks to several large-scale orders, which tend to be volatile. “Orders excluding large-scale orders actually fell to a post-pandemic low,” she added.

For 2023 overall in comparison to the previous year, factory orders were down 5.9%.

While this “hard” data from December does not yet suggest recovery is in sight, the most recent Purchasing Managers’ Index report indicates that the worst may be over soon in the manufacturing sector, Schmieding said.

“Although at 45.5 still below the 50 line that divides growth from contraction, it edged up to an 11-month high,” he noted.

Even so, economic growth is unlikely to be imminent, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, told CNBC.

“We are still nowhere near the kind of activity in the German industry that we saw pre-pandemic,” he explained. “We still expect a modest contraction in Q1, but it’s likely to be less severe than 23Q4,” van Harn said. He is then anticipating growth to pick up slightly, but sees full-year growth as being flat.

Others are even more pessimistic about the German economy.

“We stick to our forecast that the German economy will shrink by 0.3% in 2024 as a whole,” Commerzbank Chief Economist Jörg Krämer told CNBC.

This would be broadly in line with how Germany’s economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.

This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.

“Companies simply have too much to digest — global rate hikes, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explained, addressing reasons for the downturn.

Some of these headwinds may also play a key role when it comes to weakening export figures, Rabobank’s van Harn pointed out. Factors like cheap energy from Russia, strong demand from China and surging global trade buoyed Germany’s exports for decades, “but are now faltering,” he said.

Looking beyond the purely economical, national and international politics could also be a risk for the country’s economy, the experts say.

Germany’s coalition government has been under pressure after going through a budget crisis following a decision from the constitutional court that the re-allocation of unused debt taken on during the pandemic to current budget plans is unlawful.

This left a 60-billion-euro hole in the coalition’s budget plans, and as the funds were allocated for years to come, the crisis is likely to rear its head again at the end of the year when 2025 budget planning begins.

Voter satisfaction with the government is also low, with the opposition CDU party currently leading in the polls and being followed in second place by Germany’s far-right party, the AfD. Support for the latter has however declined in recent weeks amid protests against the far-right sweeping the country, with hundreds of thousands of Germans taking to the streets.

Elsewhere, the U.S. election could make things more difficult as well, Schmieding suggested.

“Trade war threats by Trump could be a significant negative for Germany,” he said – however this of course depends on the outcome of the election, and may not unfold in full force until 2025, he noted.

 

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