Germany’s economy is struggling, facing a second consecutive year of contraction in 2024 due to high energy prices, rising interest rates, and declining export demand. GDP fell by 0.2%, following a 0.3% drop in 2023, marking the first recession since 2002/2003. Consumer confidence and spending are low, particularly in construction and exports. Public finances are strained, with a deficit of 113 billion euros. The outlook remains bleak, with predictions of minimal growth and continued economic challenges into 2025.
The Ongoing Economic Struggles in Germany
The German economy has faced a significant downturn, contracting for the second consecutive year in 2024. Factors such as soaring energy prices, rising interest rates, and intensifying competition in the export sector have severely hampered recovery efforts. As reported by the Federal Statistical Office, the country’s gross domestic product (GDP) dipped by 0.2 percent last year, following a 0.3 percent decline in 2023. This marks the first occurrence of two back-to-back years of recession since 2002/2003.
Ruth Brand, head of the statistical agency, highlighted several challenges that have obstructed economic growth: “Conjunctural and structural burdens stood in the way of better economic development in 2024.” She pointed out that increasing competition in key sales markets, high energy costs, persistent interest rates, and uncertain economic prospects have all contributed to the current situation.
Impact on Various Sectors and Public Finances
Uncertainty looms across many sectors, affecting consumer confidence and spending. The anticipated consumer boom driven by increasing real wages failed to materialize, as many individuals still deal with the purchasing power losses from previous years. Additionally, widespread concerns about job security have led Germans to adopt a more cautious approach, resulting in increased savings.
The construction industry is particularly vulnerable, grappling with weak demand as the dream of homeownership has been dashed for many potential buyers due to inflated financing and material costs. Exporters are also feeling the strain from diminished demand, especially from China. Political instability, including issues stemming from the ongoing conflict in Ukraine and the recent turbulence within the federal government, has compounded these challenges.
The economic outlook continues to be grim. Recent GDP figures reveal the depth of the crisis, with many businesses hesitant to invest due to the uncertain political climate ahead of the federal elections in February. The ifo Institute’s survey of approximately 9,000 executives reveals a sentiment as bleak as during the pandemic, with ifo President Clemens Fuest stating, “The weakness of the German economy has become chronic.”
Public finances have also been adversely affected, with Germany recording a higher deficit in 2024. Preliminary estimates indicate that government expenditures outstripped revenues by 113 billion euros, a rise of about 5.5 billion euros compared to 2023. This amounts to a deficit of 2.6 percent of GDP, consistent with the previous year. The increase in financing deficits among states, municipalities, and social security is primarily attributed to higher pension and retirement expenditures, alongside increased spending on care and citizen income.
Despite some attempts to reduce the deficit at the federal level, where it dropped from approximately 95 billion euros in 2023 to just over 59 billion euros, the overall economic forecast remains pessimistic. The Bundesbank has lowered its growth expectations, now predicting only a meager 0.2 percent growth for 2025, while the Council of Economic Experts anticipates a slight increase of 0.4 percent.
Looking ahead, the Organisation for Economic Co-operation and Development (OECD) warns that Germany is on track for the slowest growth rate among developed countries in 2025. Chief economist Cyrus de la Rubia commented, “Looking back over the last 60 years, Germany is on course to grow as slowly as never before in this decade.” He noted that economic output is expected to expand by only about half a percent from 2020 to 2024.
As 2025 begins, the economic malaise shows no signs of abating, with weak orders in the industrial and construction sectors alongside poor consumer sentiment indicating continued struggles ahead.
Germany enters the new year amidst federal elections, facing a challenging economic environment with expectations of further contraction. Early estimates suggest that the economy could have shrunk by 0.1 percent in the fourth quarter of 2024 compared to the previous quarter, highlighting the ongoing uncertainty. Chief economist Robin Winkler emphasized that if these estimates hold true, it would signify further economic decline as winter approaches.