Germany expects economy to shrink in 2024 after cutting forecast

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Germany is facing its first two-year recession since the early 2000s as the government downgraded its 2024 growth forecast for the eurozone’s largest economy.

“The economic conditions are not satisfactory at the moment,” Robert Habeck, economy minister, said on Wednesday. “But we’re in the process of working our way out of it.”

Habeck said Germany had made “real progress” in tackling the short-term factors dragging down output in recent years — soaring inflation, high interest rates and energy costs pushed up by Russia’s full-scale invasion of Ukraine.

But more long-term structural problems, such as Germany’s dire skills shortage, years of under-investment in infrastructure and excessive red tape, were stunting growth.

Habeck, who is also deputy chancellor, predicted GDP would contract 0.2 per cent this year, down from an earlier forecast of 0.3 per cent growth.

Germany, which once depended heavily on Russian gas, was hit harder than other big European economies by the energy crisis caused by the Ukraine war, which sent a chill through energy-intensive industries.

As energy prices eased, ministers and economists hoped that the economy would stage a tentative recovery this year. But a steady stream of gloomy data over the past few months has darkened the outlook.

“The upswing has been delayed once again,” Habeck said.

Consumer demand remains depressed and companies are holding back on investments as concerns about an expansion of conflict in the Middle East and China’s growing competitive threat eat away at business confidence.

Political instability has not helped, with constant squabbling between the Social Democrats, Liberals and Greens in Chancellor Olaf Scholz’s shaky coalition and strong performances by far-right and far-left populist parties in elections in three east German states last month.

Some companies, complaining of high labour and energy costs, a big tax burden and political turbulence, are considering moving some production to cheaper countries, prompting fears about deindustrialisation in Europe’s largest economy.

But Habeck sounded a cautiously optimistic note, saying the economy would start to recover next year as lower inflation and easing interest rates combined with higher real wages drove higher consumer spending. “In the past three to four quarters, people have become richer again,” he said.

The government is also hoping that its planned economic reforms will stimulate growth. The package includes investment incentives, measures to encourage people to re-enter the labour market and reductions in electricity prices for some industrial companies.

Habeck’s ministry now believes the economy will expand 1.1 per cent next year — slightly higher than its forecast from earlier this year — and by 1.6 per cent in 2026, as private consumption and investment activity rebound and as international demand increases for industrial goods.

The Green politician acknowledged that the constant wrangling in Scholz’s government was not helping matters.

But he insisted that Germany’s malaise lay much deeper. Two pillars of the country’s success — cheap Russian gas and well-functioning global markets, critical for a leading exporter such as Germany — had been kicked away, the first by the Ukraine war and the second by a combination of China’s “aggressive export strategy” and the increasing protectionism of the US, he said.

“Half of Germany’s growth always came from exports, and this pillar . . . has come under attack,” he said. “We basically haven’t had any growth since 2018.”

Germany’s growth potential was also anaemic. “Even if we do everything right, if we reduce bureaucracy and have the skilled workers and capital we need, we would only have the chance to grow 0.6 per cent,” Habeck said.

That was because of “failures not of the past few years but of past decades”, he said, saying successive governments had failed to invest enough in infrastructure, digitisation and mobilising more skilled workers.

If Habeck’s prediction for this year proves accurate, Germany will experience its first two-year recession in more than 20 years after output shrank 0.3 per cent in 2023. In 2002, it contracted 0.2 per cent and by 0.5 per cent a year later.