Germany was worst-performing major economy last year

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German output contracted 0.3 per cent last year as high inflation, rising interest rates and elevated energy costs made Europe’s largest economy one of the weakest performers in the world, according to an initial estimate released on Monday.

The decline of the German economy in 2023 compounds what has been a gloomy start to the year for the country, which has been hit by nationwide train strikes over working hours and disruptive protests by farmers against cuts to fuel subsidies.

“Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises,” said Ruth Brand, president of the federal statistical office.

The statistical office said gross domestic product was still above pre-pandemic levels after last year’s contraction followed two years of rebounding output and left it up 0.7 per cent from 2019. 

Coupled with separate data published on Monday showing eurozone industrial production fell for the third consecutive month in November, economists said the German figures pointed to a likely contraction in the wider single currency bloc in the fourth quarter.

Melanie Debono, an economist at consultants Pantheon Macroeconomics, said the risks to her forecast for a 0.1 per cent contraction of the eurozone economy in the final quarter of last year were “squarely to the downside”.

Germany was the worst-performing major economy in the world last year, according to the IMF, which recently forecast that advanced economies grew 1.5 per cent on average in 2023, while emerging market and developing economies expanded 4 per cent.

The IMF forecast that the US economy grew 2.1 per cent last year, while the eurozone expanded 0.7 per cent and the UK 0.5 per cent. That underlines how Germany’s big export-focused manufacturing sector has been hit by the loss of cheap Russian energy and a slowdown in demand from China.

A fall in German and Italian factory output contributed to a 0.3 per cent decline in eurozone industrial production in November from a month earlier, according to EU data released on Monday, taking the annual decline to 6.8 per cent.

German GDP declined 0.3 per cent in the final three months of last year from the previous quarter when output stagnated, the statistical office said. But it added that because “the data basis of this estimate is less complete than that of the regular quarterly calculation, there is a higher degree of uncertainty”.

Column chart of German GDP (annual % change) showing the post-pandemic recovery of the German economy has stalled

German retail sales, exports and industrial production all fell last year. Households were hit by the biggest surge in the cost of living for a generation while the country’s sprawling manufacturing sector suffered from high energy costs, weak global demand and rising financing costs.

Household consumption fell 0.8 per cent last year, taking it 1.5 per cent below pre-pandemic levels, the statistics office said. The gross value added of industry, excluding construction, contracted 2 per cent last year. Government spending declined 1.7 per cent as pandemic-related measures were phased out.

Growth in the country is expected to pick up to 0.6 per cent this year, according to the OECD, which would still make it one of the world’s weakest large economies. Several analysts have cut their forecasts since the government slashed spending plans to address a €60bn hole in its budget left by a constitutional court ruling against off-balance sheet funds.

“The recessionary conditions, which have been dragging on since the end of 2022, look set to continue this year,” said Andrew Kenningham, an economist at consultants Capital Economics, predicting zero growth for German GDP in 2024.

Economists expect consumer spending to rally in Germany this year as household purchasing power recovers, thanks to continued strong growth in wages and slower rates of inflation.

German inflation fell from above 11 per cent in late 2022 to as low as 2.3 per cent last November. However, consumer prices are still more than 20 per cent higher than they were before the pandemic and inflation rose to 3.8 per cent in December after the government phased out energy subsidies.

“Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth,” said Brand.

An increase in borrowing costs to their highest level for more than a decade — after the European Central Bank raised its deposit rate to 4 per cent to tackle inflation — has stymied demand for industry and triggered a 10 per cent fall in German house prices.

“Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll,” said Brand. 

There was better news from eurozone trade data for November, showing exports from the bloc rose 1 per cent from the previous month, while imports dipped 0.6 per cent. However, compared with a year earlier, eurozone exports were still down 4.7 per cent, while imports fell 16.7 per cent, reflecting drops in the price of energy and food imports.

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