German economy shrinks for second year in a row

 

German economy shrinks for second year in a row

 

First consecutive year of declining GDP since early 2000s highlights challenges facing next government

 

Richard Partington Economics correspondent

Wed 15 Jan 2025 11.54 GMT

https://www.theguardian.com/world/2025/jan/15/german-economy-shrinks-for-second-year-in-a-row-2024

 

Germany’s economy has shrunk for a second consecutive year for the first time in more than two decades, highlighting the challenges the next government will face after snap elections in February.

 

As voters prepare to head to the polls amid heightened political uncertainty in Europe’s largest economy, official figures showed gross domestic product fell by 0.2% last year after dropping by 0.3% in 2023.

 

The figures represent only the second two-year contraction in the German economy since the 1950s, after it shrank in 2002 and 2003.

 

“The early 2000s were the last time Germany received the very flattering title of ‘sick man of Europe’. History doesn’t repeat but it rhymes,” said Carsten Brzeski, an analyst at the Dutch bank ING.

 

The German economy has come under intense pressure as the country’s industrial companies cut production in the face of subdued domestic demand, soaring energy prices and increased competition from Chinese imports.

 

The latest figures showed manufacturing output was down significantly in 2024, with gross value added falling by 3% compared with the previous year. The decline was led by a sharp drop in car manufacturing, chemicals and energy-intensive industry.

 

Late last year, one of the country’s biggest employers, Volkswagen, agreed with unions to cut more than 35,000 jobs by 2030 after a slump in demand – although the carmaker scrapped plans to close plants for the first time.

 

The construction industry shrank by 3.8%, as higher prices for raw materials and elevated interest rates weighed on building projects, particularly for residential schemes. Services activity expanded by 0.8%, led by the retail sector, while car sales, wholesaling and food and drink activities declined.

 

While it narrowly avoided a technical recession – defined by economists as two quarters of shrinking GDP – Germany has swung between growth and contraction in every quarter for the last two years. The economic struggles contributed to the collapse of the Olaf Scholz’s coalition government and an early election next month.

 

German voters will head to the ballot box on 23 February, with Alternative für Deutschland having gained momentum in opinion polls, putting the far-right party behind only the conservative CDU/CSU alliance.

 

The European Central Bank is expected to keep cutting interest rates this year as economic growth falters across the eurozone’s traditionally powerhouse countries, despite concerns over lingering inflation and the prospect of the second presidency of Donald Trump reigniting global inflationary pressures.

 

Claus Vistesen, the chief eurozone economist at the consultancy Pantheon Macroeconomics, said: “These figures paint a bleak picture, particularly in private-sector investment, which is now firmly in recession.

 

“The decline in interest rates and easing bank lending conditions will provide some relief in 2025, but the incoming government, following February’s elections, will face immediate pressure to address this trend.”