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Economic situation: German economy without tailwind – minus at the end of the year

Economic situation: German economy without tailwind – minus at the end of the year

Companies are holding back on investments, construction is in the doldrums, and demand for “Made in Germany” is weakening. The coming months are not likely to be easy for Germany either.

Germany is facing difficult months after a decline in economic output. Gross domestic product (GDP) shrank by 0.3 percent in the fourth quarter of 2023 compared to the previous quarter, adjusted for price, calendar and seasonally.

“In the final quarter, declining investments slowed down the economy, while consumption increased slightly,” the head of the Federal Statistical Office, Ruth Brand, confirmed preliminary data from the authority. Economists expect the weakness to continue for the time being. Hopes for a strong economic recovery this year have dwindled.

“German economic output could decline slightly again in the first quarter,” said Bundesbank President Joachim Nagel. If GDP shrinks for two quarters in a row, economists speak of a technical recession. That doesn’t mean the full year is negative. However, Germany had already slipped into recession overall in 2023 with a decline in economic output of 0.3 percent.

Some economists do not rule out a further decline in 2024 as a whole. The federal government only expects mini-growth of 0.2 percent. “We are emerging from the crisis more slowly than hoped,” said Economics Minister Robert Habeck recently.

“A little more light than shadow”

According to Bundesbank President Nagel, the outlook for 2024 promises “a little more light than shadow”. The economy is expected to regain momentum over the course of the year. Tailwind should come from demand from abroad. In addition, private consumption is likely to benefit from the improvement in purchasing power. “Thanks to a stable labor market, sharply rising wages and falling inflation, people will effectively have more money in their pockets.” In his opinion, the business location is still well positioned compared to the rest of the world, despite structural problems. “Germany is not the sick man of the global economy.”

At the end of the year, private consumer spending rose by 0.2 percent. Inflation has recently weakened, which can boost people’s desire to consume. However, there were signs of slowdown in investments. Those in buildings fell compared to the previous quarter. Construction is suffering from increased interest and costs. Companies also invested less in equipment such as vehicles and machinery. One reason may have been the expiration of funding for electric cars, explained economists at Deutsche Bank subsidiary DWS.

The mood among companies has recently brightened slightly. The Ifo business climate rose in February. “The economy is stabilizing at a low level,” said Ifo President Clemens Fuest.

The national deficit is shrinking

There was a ray of hope in public finances. Last year the tax authorities once again spent more money than they took in. However, the federal, state, local and social insurance deficits fell by 9.5 billion euros to 87.4 billion euros compared to the previous year, partly because a large part of the expenditure to combat the pandemic was omitted.

The federal government had the biggest loss of 79 billion euros. Declining federal transfers and ongoing financial burdens to care for refugees contributed to the fact that the states (6.4 billion euros) and municipalities (12.1 billion euros) also had financing deficits. Social insurance (10 billion euros), on the other hand, recorded a slight increase in surpluses.

Based on total economic output, the deficit was 2.1 percent. The Federal Office initially assumed 2 percent. In 2022 it was 2.5 percent. Because of the Federal Constitutional Court’s budget ruling, the federal government is still forced to make savings.

After two outliers in the Corona years 2020 and 2021, Germany complied with the European debt rule for the second year in a row, which allows EU states to have a budget deficit of a maximum of three percent. The rules were suspended because of the Corona aid programs. Representatives of the European Parliament and the governments of the EU member states recently agreed on a reform. The plans stipulate that the individual situation of countries will be taken more into account when setting EU targets for reducing excessive deficits and debts.

Source: Stern

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