For the second year in a row, Germany cannot get out of recession. Europe's largest economy shrank by 0.2 percent in 2024 compared to the previous year, according to official preliminary data from the Federal Statistical Office (Destatis). There is nothing surprising in them - they are in line with the forecasts of most experts.
Hopes for the ECB and the February elections
There are no signs of a noticeable acceleration of economic development in the near future. Again, from official statistics, it can be concluded that the German economy began 2025 in a state of decline or, at best, stagnation, as in the fourth quarter of 2024, Germany's GDP shrank by 0.1% compared to the previous third quarter.
According to the head of Destatis, Ruth Brandt, the main reasons for the ongoing crisis are "increasing competition for German export industries in important markets, high energy prices, the still high level of interest rates, as well as the uncertain economic outlook".
Soon, one of the above reasons may disappear - we are talking about the high level of interest rates, as the European Central Bank has already started to lower them in 2024 against the backdrop of a sharp slowdown in inflation rates in Europe. This trend is expected to continue in 2025 - with the aim of making loans cheaper.
The reduction in mortgage interest rates could in turn give a boost to housing construction and the construction industry as a whole. Its activity fell particularly sharply last year - by 3.8 percent.
In addition, the upcoming early parliamentary elections on February 23 could put an end to political uncertainty in Germany if, based on their results, it becomes possible to form a stable governing coalition and if the new government immediately takes convincing steps to solve urgent economic problems.
China - a problem for the export-oriented German economy
At the same time, uncertainty in trade relations with the United States may persist, because it is not known when and how the new US President Donald Trump will implement his protectionist election promises (or threats). One of them provides for customs duties on goods imported from Europe. Deliveries to the US are of great importance to the export-oriented German economy, especially for the manufacturing industry.
The importance of the US market grew even more last year due to the continuing decline in exports to China. Speaking of growing competition in important markets, Ruth Brandt is referring to China. For example, the reduction in the production of machinery and cars in Germany is directly related to the decline in sales on the Chinese market.
Overall, exports of goods and services from Germany fell by 0.8 percent last year. Considering that in 2023 German exports exceeded 1.5 trillion euros, 0.8% is quite a large amount.
As for energy prices, they are significantly lower today than in 2022 after, against the backdrop of the war in Ukraine, Russia first reduced and then completely stopped natural gas supplies to Germany. However, energy is more expensive than in the past decade, which is why production volumes in energy-intensive industries such as the chemical industry, metallurgy and metalworking remained low in 2024, Destatis noted.
High employment and moderate budget deficit
Consumer spending in Germany grew by only 0.3 percent, if inflation is taken into account, so it only sent "weak positive signals", the statisticians noted. Households cut their spending on restaurants and hotels by 4.4 percent, and spent 2.8 percent less on clothing and shoes.
At the same time, government spending increased by 2.6 percent, mainly due to a noticeable increase in social payments - Destatis explains that the state spent more money on hospital stays, medicines and care for the sick or elderly.
Despite the continued decline in GDP, employment in Germany increased again in 2024 and set a new record. Last year, there were 46.1 million people in employment, which is 72,000 more than in 2023. At the same time, it should be noted that the growth in employment was only in the service sector, such as education and healthcare, while the number of workers in the manufacturing sector and construction decreased.
Destatis also reports that in 2024 the budget deficit was 2.6 percent of GDP, i.e. it did not exceed the level of three percent, considered the maximum permissible in accordance with the EU's adopted criteria for financial stability. So the next government will have a certain opportunity to increase the deficit in order to direct the funds taken - for example, for investments in infrastructure, thus giving an additional impetus to GDP growth.
Author: Andrey Gurkov