It will take some time until the official figures are available, but last year the German economy likely shrank. Looking back, economists and industry associations have rarely been so unanimous in their views: 2023 was a year of stagnation.
The signs for 2024 don’t look encouraging either.
Or as Moritz Kraemer, the chief economist at Landesbank Baden-Württemberg, put it more pointedly in a recent TV interview about quarterly figures: “I don’t want to argue about whether it’s plus 0.2% or minus 0.2%. The fact is, we are stagnating.”
Kraemer compared the ongoing sluggish growth of the German economy to the waves of a corrugated sheet of metal. “We are moving in a kind of ‘corrugated economy.’ It goes up and down a little bit, but actually we are lying flat on the ground.”
How did Germany get here?
The reasons why Germany is suffering are well known. Consumers are holding back due to inflation and rising prices. Plus the sluggish global economy is putting a strain on exporters, which used to be a driving force of the economy.
In addition, due to unstable energy prices, numerous international corporations are putting their investment plans on hold. Or worse, they are building new production capacities abroad — in the United States or China, far away from the European Union.
Finally, the ambitious green transformation of Europe’s largest economy, driven by economy and climate minister, Robert Habeck, is costing a lot of money.
Germany’s climate and industrial projects are in jeopardy after a major court decision about the federal budget cut fundingImage: Sebastian Gollnow/dpa/picture alliance
A balanced budget and a big hole
Last year in mid-November, just when it seemed things couldn’t get worse, the Constitutional Court rejected the government’s reallocation of €60 billion ($65 billion) in COVID-19 loans for climate protection and the modernization of the economy.
The government’s plans relied heavily on using this money in the coming years, and the court’s decision created a giant hole in the budget.
You’d think that parliament could simply approve new loans — this time not for COVID measures, but for the energy transition and other purposes.
But Germany’s “debt brake” won’t allow this. The fiscal rule, added to the constitution in 2009, forces the government to keep its books balanced and strictly limits new borrowing. Approving additional debt of €60 billion had only been allowed by declaring the pandemic an emergency, which in turn made it possible to temporarily suspend the debt brake.
Less spending, less growth
The ruling threw the government’s budget calculations out of the window and caused major uncertainty among businesses and consumers. And it forced the government to look for savings options.
At the end of November, after rounds of hard negotiations, the government agreed on a supplementary budget for 2023 and suspended the debt brake for that year.
The budget for 2024 was slashed considerably. Some fear that the planned cost cutting, fewer subsidies and higher energy prices could slow the economy further, and even rekindle inflation.
As a result of the ruling, Habeck’s climate and industrial policy projects are in jeopardy, too. His ministry estimated that this could result in up to half a percentage point less economic growth.
According to ING chief economist Carsten Brzeski, the ruling has revealed two new risk factors for the German economy: fiscal austerity and political uncertainty.
“Things are going really bad for Germany right now,” said Thomas Gitzel, chief economist at VP Bank. The government must act urgently. “But the Constitutional Court’s ruling could force austerity measures on the government that could lead to an additional dampening of growth.”
Looking at the numbers from different sides
Even before the court ruling, the European Commission had seen Germany as bringing up the rear in terms of growth in the eurozone next year, with an expected increase of 0.8%.
The German government’s current economic forecast still assumes an increase in gross domestic product (GDP) of 1.3% for 2024.
But nearly all of the most respected economic researchers expect German GDP growth of well below 1% for 2024.
The Organization for Economic Cooperation and Development (OECD) predicts an increase of 0.6%. In contrast, the average growth of all the 38 OECD member countries is estimated at 1.4% according to numbers released on November 29.
Crisis in seemingly every direction
“The energy crisis hit Germany more than other countries because industry plays a more important role in this country and dependence on Russian gas was much higher than in other countries,” said OECD economist Isabell Koske, summarizing the reasons for the economic weakness.
High inflation reduced the purchasing power of households and thus affected consumption. “The government budget crisis is also unsettling companies and consumers,” she said.
It’s crucial to “solve the budget crisis as quickly as possible in order to give companies and households planning security and confidence in the future,” said Koske. A solution should include cuts in expenditure, increases in revenue and a reform of the debt brake.
No growth at all in the end?
The experts at Deutsche Bank are even more pessimistic. Stefan Schneider from DB Research thinks Germany’s economy will shrink in 2024.
Moritz Schularick, president of the Kiel Institute for the World Economy, summed up the stress factors for the German economy in a speech at a Bundesbank reception in Berlin in mid-October. Germany has made three big bets in the past decades that are currently causing problems for the country.
“A bet on Russian gas as a cheap energy source for industry. A bet on the Chinese economic miracle as a driver for German exports. And a bet on Pax Americana, on the outsourcing of national security to America,” he said. On all three points, the country has come to the end of the road.
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