Germany Sidesteps Recession Despite Year-End Contraction

By Francis 7 Min Read

Germany continued to dodge a recession in the wake of the energy crisis, despite output shrinking at the end of 2023 and across the year as a whole.

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(Bloomberg) — Germany continued to dodge a recession in the wake of the energy crisis, despite output shrinking at the end of 2023 and across the year as a whole.

Gross domestic product fell 0.3% between October and December, according to a preliminary estimate Monday, but an upward revision to the previous three months meant Europe’s largest economy avoided two straight quarters of contraction.

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It was nevertheless a tough year: GDP also shrank 0.3% over the full 12 months — the first such downturn since the pandemic. It’s a stark contrast to peers around the globe and one that’s raising questions about the country’s future as an industrial powerhouse.

Germany had been singled out by forecasters as the world’s only major developed nation that would fail to record economic expansion last year — largely due to its manufacturing sector reeling from higher energy costs, surging interest rates and subdued foreign demand.

While the year began with relief that the energy shock triggered by Russia’s war in Ukraine would be more manageable than initially feared, the economy lost steam and never regained traction. A recovery that had been expected in the second half of the year failed to materialize, with output faltering even as inflation retreated. 

The disappointing performance sparked a debate over whether Germany is once again turning into the “sick man” of Europe — a moniker it first earned after reunification in the 1990s weighed on the economy and brought stubbornly high unemployment.

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Top officials including Finance Minister Christian Lindner and Bundesbank President Joachim Nagel have dismissed such talk, insisting the country has proved it can adapt to a changing environment. 

The central bank has nevertheless acknowledged challenges to a business model that was long based on Russian energy imports and a strong reliance on China — both for components and as a market for combustion-engine cars. 

While natural gas prices have fallen sharply from a peak reached after the Kremlin cut off supplies, they remain higher than before Covid struck. The chemical industry is among the sectors most affected, with companies including BASF SE and Lanxess AG responding by shelving investments and laying off workers.

Continued squabbling within Chancellor Olaf Scholz’s three-party alliance has, meanwhile, highlighted the difficulty in agreeing measures to tackle Germany’s woes.

That’s helped feed a surge in popularity for the far-right AfD, which now leads polls in three eastern German provinces that hold elections this year. Most recently, dissatisfaction with the government has brought protests by farmers, who disrupted traffic nationwide last week and are holding their main rally in Berlin on Monday.

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The Constitutional Court created further headwinds at the end of 2023 by disrupting the coalition’s plans to finance investments via off-balance sheet funds, forcing savings in the current budget and fueling fresh uncertainty among households and firms.

Ongoing concerns about Germany’s prospects are reflected in forecasts for this year. The OECD said in November that, at 0.6%, growth will be the slowest among all Group of 20 members except Argentina.

—With assistance from Joel Rinneby, Kristian Siedenburg, Michael Nienaber and Jana Randow.

(Recasts to reflect recession was avoided.)

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