Germany’s economy contracted for the first time since the onset of the Covid-19 pandemic, increasing the risk of a broader economic downturn in the euro area, according to official data from Germany’s Federal Statistical Office (Destatis). Gross domestic product (GDP) in 2023 was 0.3% lower than the previous year, reflecting challenges in an environment marked by multiple crises, as stated by Destatis President Ruth Brand. The decline in the fourth quarter by 0.3% compared to the previous quarter raised concerns, though Germany narrowly avoided a recession, defined as two consecutive quarters of falling GDP.
The weakened economic performance is attributed to factors such as high inflation, which, although easing, continues to impact various sectors. Rising interest rates and weakened domestic and foreign demand also played a role. Germany’s economic woes are of concern for the entire euro area, given its status as the largest economy among the 20 that make up the region. The euro area already experienced a slight contraction in output in the third quarter of 2023, and upcoming figures for the final quarter will confirm whether the region slipped into a recession by the year’s end.
The decline in German GDP is indicative of widespread weakness, notably in the vast manufacturing sector. The manufacturing industry faced challenges from faltering Chinese demand, high energy costs, and significant interest rate hikes. While car production and the manufacture of other transport equipment saw growth, output contracted in the energy-intensive chemical and metal industries. Overall, industrial production, dominated by manufacturing, contracted by 2%, according to Destatis. The service sector also felt the impact, with a sharp contraction in wholesale and retail trade, along with reduced household and government spending.
Despite these challenges, there was a silver lining in the employment sector. Employment grew by a record 0.7%, adding 333,000 people compared to 2022, reaching a total of 45.9 million. Foreign workers and an increased domestic labor force offset the dampening effects of Germany’s aging population, according to Destatis. However, experts warn that recessionary conditions may persist in 2024, with business investment likely to contract, construction facing a downturn, and fiscal policy tightening. Some relief for households is expected due to the recent fall in inflation, but the overall economic outlook remains uncertain.