Germany's economy has been struggling and the latest data has provided little hope for improvement.
Economists say the worst may soon be over, but are still not hopeful about economic growth in 2024 and suggest the country may enter a technical recession this year.
Headwinds include a slowdown of global trade, higher energy prices, and national and international political uncertainty.
Federal Chancellor Olaf Scholz (SPD, r-l), Robert Habeck (Alliance 90/The Greens), Federal Minister for Economic Affairs and Climate Protection, and Christian Lindner (FDP), Federal Minister of Finance, follow the debate at the start of the budget week.
Michael Kappeler | Picture Alliance | Getty Images
Good news has been sparse for the German economy. And the latest economic data has not done much to change this.
A few key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the "sick man of Europe" resurface.
"The data confirm that German industry is still in recession," Holger Schmieding, chief economist at Berenberg Bank, told CNBC.
Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.
Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.
But this growth "is not much reason for comfort," Franziska Palmas, senior Europe economist at Capital Economics told CNBC, explaining that it is thanks to several large-scale orders, which tend to be volatile. "Orders excluding large-scale orders actually fell to a post-pandemic low," she added.
For 2023 overall in comparison to the previous year, factory orders were down 5.9%.
While this "hard" data from December does not yet suggest recovery is in sight, the most recent Purchasing Managers' Index report indicates that the worst may be over soon in the manufacturing sector, Schmieding said.
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"Although at 45.5 still below the 50 line that divides growth from contraction, it edged up to an 11-month high," he noted.
Even so, economic growth is unlikely to be imminent, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, told CNBC.
"We are still nowhere near the kind of activity in the German industry that we saw pre-pandemic," he explained. "We still expect a modest contraction in Q1, but it's likely to be less severe than 23Q4," van Harn said. He is then anticipating growth to pick up slightly, but sees full-year growth as being flat.
Others are even more pessimistic about the German economy.
"We stick to our forecast that the German economy will shrink by 0.3% in 2024 as a whole," Commerzbank Chief Economist Jörg Krämer told CNBC.
This would be broadly in line with how Germany's economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.
This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.
"Companies simply have too much to digest — global rate hikes, high energy prices, less tailwind from China and an erosion of Germany as a business location," Krämer explained, addressing reasons for the downturn.
Some of these headwinds may also play a key role when it comes to weakening export figures, Rabobank's van Harn pointed out. Factors like cheap energy from Russia, strong demand from China and surging global trade buoyed Germany's exports for decades, "but are now faltering," he said.
Looking beyond the purely economical, national and international politics could also be a risk for the country's economy, the experts say.
Germany's coalition government has been under pressure after going through a budget crisis following a decision from the constitutional court that the re-allocation of unused debt taken on during the pandemic to current budget plans is unlawful.
This left a 60-billion-euro hole in the coalition's budget plans, and as the funds were allocated for years to come, the crisis is likely to rear its head again at the end of the year when 2025 budget planning begins.
Voter satisfaction with the government is also low, with the opposition CDU party currently leading in the polls and being followed in second place by Germany's far-right party, the AfD. Support for the latter has however declined in recent weeks amid protests against the far-right sweeping the country, with hundreds of thousands of Germans taking to the streets.
Elsewhere, the U.S. election could make things more difficult as well, Schmieding suggested.
"Trade war threats by Trump could be a significant negative for Germany," he said – however this of course depends on the outcome of the election, and may not unfold in full force until 2025, he noted.
By Jessica Parker & Damien McGuinness,BBC News, Berlin 21 February 2024
Robert Habeck has previously warned that the economic situation in Germany was 'dramatically bad'
The German economy is in "troubled waters," according to country's economy minister.
Robert Habeck said the German government's forecast for economic growth for 2024 had been revised down from 1.3% to 0.2%.
This means that Europe's largest economy has effectively stalled - although it has avoided entering a full-blown recession.
Mr Habeck previously called Germany's economic situation "dramatically bad".
Today, he said that Germany had been hit by a "very specific situation" after Putin's full invasion of Ukraine because its energy-intensive industries were dependent on Russian gas.
Germany's reliance on exports made it particularly vulnerable to changes in global trade patterns, he said, and the broader structural problem for the German economy was its lack of workers. Without migrant workers Germany's economy would collapse, Mr Habeck said.
Energy costs soared after Russia's full invasion of Ukraine two years ago. This sparked inflation, meaning that households are feeling squeezed.
The country may in fact have already slid into recession, according to a warning by Germany's central bank, the Bundesbank.
The German economy shrank marginally in 2023 and contracted by 0.3% in the fourth quarter of that year.
In its monthly report the Bundesbank said "stress factors" would probably remain and that economic output could therefore "decline again slightly in the first quarter of 2024".
Two negative quarters in a row would put Germany into a so-called technical recession.
Given that the German economy is predicted to grow slightly in 2024, economists are not talking of a full-blown recession.
Inflation rates are now falling, unemployment remains low and energy costs have come down, meaning that economists expect the economy will gradually recover this year. ??Despite gloomy predictions, Germany managed to successfully pivot away from Russian gas without the lights going out. After years of stagnation, wages in many sectors are rising, which should boost consumer demand.
But businesses are pessimistic.
André Kasimir owns a building firm and says the government is not helping businesses like his
Germany is on its way to being the "sick man of Europe", claims André Kasimir, who owns building firm Kasimir Bauunternehmung.
High interest rates, skilled labour shortages and the country's famed bureaucracy have, say industry figures, plunged the sector into crisis. In 2023 insolvencies in the construction sector rose more than 20%.
Bosses say building new homes has become "practically impossible", despite a desperate housing shortage in cities like Berlin.
Construction projects take far too long to get approved while Mr Kasimir also views heating and noise regulations as too costly.
"The government does not have a clue what to do to make it easier for us to build and to live," he said.
Business leaders say that many of the country's economic woes are caused by political in-fighting. ??Politicians are squabbling over the government's new law to stimulate the economy. Mr Habeck has drafted legislation which should cut bureaucracy and give German businesses billions of euros of tax breaks.
The law has been passed in German parliament's lower house, the Bundestag, but is being blocked by opposition conservatives in the upper house.
Squabbling within Chancellor Olaf Scholz's argumentative three-way governing coalition has also irritated voters, meaning that the government's poll ratings are at a record low. Initial plans to paper over policy differences with lavish spending were blown up when the constitutional court ruled the government's budget illegal.
Student Elmedina says she is 'not so satisfied' with what Germany has to offer right now
Government leaders have opposing views on what the solution is. ??Economy Minister Robert Habeck's Green Party wants to amend constitutional debt rules to allow more spending on infrastructure. The liberals, who run the finance ministry, view low debt as sacrosanct and are pushing for tough austerity measures.
The obvious divisions within the coalition are creating a lot of "uncertainty", says Professor Stefan Kooths from the Kiel Institute for the World Economy.
Deep unhappiness with the political class isn't hard to find on the streets of Germany's capital.
"We fell, especially under the government of Angela Merkel, a bit asleep," says Berlin resident Cathrin. "So I think we have to catch up against the big economies like China."
Architecture student Elmedina is from Kosovo but, dismayed by a lack of good job opportunities, she's questioning whether her future does now lie in Germany.
"I had an idea that I would be able to live a better life… but I'm not so satisfied with what Germany has to offer right now."