Economic Contraction Deepens: Germany Faces Export Challenges

The German economy continues to struggle, showing no signs of recovery as it enters 2025. In the fourth quarter of 2024, the country's gross domestic product (GDP) contracted by 0.2% compared to the previous quarter, a decline that was larger than earlier estimates indicated. The Federal Statistical Office in Wiesbaden reported this data, revising its previous forecast of a 0.1% decrease.

While private consumer spending and government expenditure saw increases at the end of the year, exports plummeted significantly compared to the previous quarter. Experts point to a persistent stagnation affecting the economy, with notable challenges stemming from aggressive industrial policies in China and uncertainties related to potential new tariffs from the United States.

This contraction marks the second consecutive year of decline for the German economy, with a total decrease of 0.2% in GDP for 2024. This situation represents the longest recession period since the early 2000s, specifically the economic downturn experienced in 2002 and 2003.

Looking ahead, there are no immediate signs of improvement. Early indicators, such as the Ifo Business Climate Index and order intake data, do not suggest a recovery in the first quarter of 2025. Analysts predict only a weak economic rebound in the spring months.

The German government recently revised its growth forecast for 2025 down to 0.3%, a significant reduction from the previously anticipated 1.1% growth. Similar modest projections have been made by the Bundesbank and the Council of Economic Experts, with expected growth rates of 0.2% and 0.4%, respectively. A more substantial recovery is not anticipated until 2026, when the government forecasts a growth rate of 1.1%.

Although consumer spending may provide some support, it is insufficient to offset broader economic weaknesses. Concerns about the job market and rising living costs have made consumers cautious about spending. Experts note that while there may be signs of stabilization, robust growth is unlikely in the near future.

Additionally, the potential for economic boost could arise from decreasing interest rates set by the European Central Bank (ECB), which would lower borrowing costs for businesses and individuals. However, uncertainties related to U.S. trade policies and the upcoming elections in Germany, scheduled for February 23, continue to cloud the economic outlook.

There are hopes that a change in government could lead to new economic initiatives, but any significant effects are not expected to materialize until 2026. Current projections suggest that if a new government is formed, it may take time to address pressing economic issues, particularly if focus shifts towards migration rather than economic growth.

Germany has faced sluggish growth for several years, trailing behind other nations in terms of economic performance. Data from the Ifo Institute indicates that the inflation-adjusted GDP for 2024 is only slightly above pre-pandemic levels from 2019, marking the longest stagnation period in post-war history.

The economic downturn is increasingly impacting the labor market, with many industries opting to reduce their workforce. Key sectors such as automotive and machinery production have seen declines in output, leading to reduced exports and significant drops in investment in machinery, equipment, and construction.

As consumer spending grows at a modest pace, many individuals are tightening their belts due to rising prices and job insecurity. Furthermore, high energy costs and bureaucratic challenges continue to hinder the business environment in Germany.