Germany's Economy Faces Continued Contraction in 2024

The German economy has experienced further contraction in 2024, marking a challenging period for the nation. According to data from the Federal Statistical Office, the state recorded a budget deficit of EUR113 billion last year, exceeding revenues significantly. This deficit represents an increase of approximately EUR5.5 billion compared to 2023.

Relative to overall economic performance, the deficit remained at 2.6% of GDP, consistent with the previous year but up from 2.1% in 2022. The European Union's Growth and Stability Pact allows for a maximum deficit of 3%, which Germany has managed to stay within. The primary driver of the financial shortfall has been increased spending on pensions and social benefits, with notable hikes in funding for care services and the citizen's income program.

Interestingly, the federal government managed to reduce its deficit significantly, from around EUR95 billion in 2023 to approximately EUR59 billion. This improvement was attributed largely to the expiration of energy crisis relief measures, such as gas and electricity price caps, at the end of 2023, according to the statistical office.

Analysis suggests that the German economy has struggled to gain momentum, following a slight uptick in the first quarter of 2024. The Gross Domestic Product (GDP) saw a decline in the second quarter, though there was a modest recovery in the third quarter. However, estimates indicate another contraction in the final quarter, with a projected decline of 0.1% compared to the previous quarter. It is important to note that this initial estimate is based on incomplete data and may be subject to revisions, with further details expected to be released on January 30.

Various factors are contributing to the current economic malaise. A slowdown in growth from China, traditionally a key driver for global markets, has put additional pressure on the German economy. Domestically, an increase in business bankruptcies has been observed, coupled with bleak export prospects for the industrial sector. Key industries, including automotive and chemical manufacturing, are facing significant challenges, and the construction sector is also in a crisis. Consumer confidence remains low, which has hindered private spending, while high energy prices and bureaucratic hurdles continue to impact the business environment negatively.

The outlook for 2025 appears grim, with limited optimism for recovery. The economic landscape is being closely monitored, especially with potential reforms anticipated following the Bundestag elections. However, uncertainties loom large, particularly with the prospect of hefty tariffs on European imports under the incoming U.S. administration, which could disproportionately affect Germany as an export-driven economy.