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German output shrank 0.3 percent last year as Europe's largest economy became one of the world's weakest due to high inflation, rising interest rates and increased energy costs, according to an initial estimate published on Monday.
The decline of Germany's economy in 2023 adds to a grim start to the year for the country, which has been hit by nationwide train strikes over working hours and disruptive farmers' protests over fuel subsidy cuts.
“The overall economic development in Germany stalled in 2023 in an environment that continues to be characterized by multiple crises,” said Ruth Brand, President of the Statistics Office.
The Federal Statistical Office said gross domestic product was still above pre-pandemic levels after last year's decline followed two years of a recovery in output and resulted in a 0.7 percent increase over 2019.
Together with separate data released on Monday showing that euro zone industrial production fell for a third straight month in November, the German figures point to a likely contraction in the larger single currency bloc in the fourth quarter, economists said.
Melanie Debono, an economist at consultancy Pantheon Macroeconomics, said the risks to her forecast of a 0.1 percent contraction in the euro zone economy in the final quarter of last year were “significantly tilted to the downside”.
A decline in German and Italian factory output contributed to a 0.3 percent month-on-month fall in euro zone industrial production in November, EU data released on Monday showed, marking an annual decline of 6.8 percent.
German GDP fell 0.3 percent in the final three months of last year compared to the previous quarter, when production stagnated, the statistics office said. However, because “the data base of this estimate is less complete than that of the regular quarterly calculation, there is a higher degree of uncertainty,” it added.
German retail sales, exports and industrial production fell last year. Households were hit by the biggest rise in the cost of living in a generation, while the country's sprawling manufacturing sector suffered from high energy costs, weak global demand and rising financing costs.
Private household consumption fell by 0.8 percent last year, 1.5 percent below the pre-pandemic level, the statistics office said. Gross value added in industry excluding construction fell by 2 percent last year. Government spending fell 1.7 percent as pandemic-related measures expire.
According to the OECD, the country's growth is expected to pick up to 0.6 percent this year, which would still make the country one of the weakest major economies in the world. Several analysts have cut their forecasts since the government cut spending plans to close a 60 billion euro gap in its budget caused by a Constitutional Court ruling against off-balance sheet funds.
“The recessionary conditions that have persisted since the end of 2022 are likely to continue this year,” said Andrew Kenningham, an economist at consultancy Capital Economics, predicting zero growth for German GDP in 2024.
Economists expect consumer spending in Germany to rise this year as household purchasing power rebounds thanks to continued strong wage growth and slower inflation rates.
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German inflation fell from over 11 percent at the end of 2022 to just 2.3 percent last November. However, consumer prices are still more than 20 percent higher than before the pandemic and inflation rose to 3.8 percent in December after the government phased out energy subsidies.
“Despite the recent price declines, prices remained high at all stages of the economic process, slowing economic growth,” Brand said.
A rise in borrowing costs to their highest in more than a decade – after the European Central Bank raised its deposit rate to 4 percent to combat inflation – has curbed demand for industry and triggered a 10 percent fall in German property prices.
“Unfavorable financing conditions due to rising interest rates and weaker domestic and external demand also took their toll,” Brand said.
There was better news from the Eurozone trade data for November. They showed that exports from the bloc rose by 1 percent compared to the previous month, while imports fell by 0.6 percent. However, compared to last year, euro zone exports still fell 4.7 percent, while imports fell 16.7 percent, reflecting lower prices for energy and food imports.
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