German economy will shrink in 2024 – national budget also in the red

The German economy shrank for the second year in a row in 2024. The gross domestic product fell by 0.2 percent compared to the previous year, as the Federal Statistical Office announced on Wednesday. In 2023 there was a decline of 0.3 percent. Most economists expect at best slight growth this year. The Organization for Economic Co-operation and Development (OECD) assumes that Europe’s largest economy will grow slower than any other industrialized nation in 2025.

The German economy is also expected to have shrunk in the final quarter of 2024. The Federal Office said that gross domestic product fell by 0.1 percent from October to December compared to the previous quarter. However, this “first very early estimate” is still based on an “incomplete database” and is therefore subject to greater uncertainty. Details are expected to be announced on January 30th.

“If you look back over the last 60 years, Germany is on track to grow more slowly than ever before in this decade,” said the chief economist at Hamburg Commercial Bank, Cyrus de la Rubia, commenting on the development. “From 2020 to 2024, economic output will only expand by around half a percent.”

The German economy was slowed down from several sides last year. The consumer boom expected in view of rising real wages did not materialize because the losses in purchasing power in previous years had not yet been made up for. In addition, many Germans are increasingly worried about their jobs, which is why they continue to save money. The construction industry is also still struggling with weak demand, as many potential home builders’ dream of owning their own four walls was dashed due to the high financing and material costs. Exporters, in turn, are struggling with weak demand from China.

There were also political uncertainties – from the Russian war against Ukraine to the budgetary turbulence in the federal government. The traffic light government finally collapsed, leading to new elections on February 23rd. The uncertain outcome of the federal election is making many companies hesitate to invest because the future economic policy framework is unclear.

The mood in the German economy at the turn of the year was worse than it has been since the Corona crisis, as the Munich Ifo Institute found in its December survey of around 9,000 managers. “The weakness of the German economy has become chronic,” said Ifo President Clemens Fuest.

The German state also spent more money last year than it took in. Based on overall economic output, the federal, state, municipal and social security deficit in 2024 was 2.6 percent, as in the previous year, as the Federal Statistical Office announced. Federal, state, local and social security spending exceeded revenue by 113 billion euros, according to an initial estimate by the Federal Statistical Office. “That was around 5.5 billion euros more than in 2023,” it said.

The EU Growth and Stabilization Pact sets an upper limit of three percent, which countries like France have been violating for years.

“The states, municipalities and social security increased their financing deficit, primarily through more spending on social benefits in kind and monetary social benefits,” explained the statisticians. “This was primarily due to higher spending on pensions and pensions.” Significantly more was also spent on nursing care and citizens’ money.

The federal government alone was able to significantly reduce its deficit against the trend, from around 95 billion euros in 2023 to a good 59 billion euros. “The fact that the measures to mitigate the energy crisis – especially the gas and electricity price brakes – expired at the end of 2023 had a particularly relieving effect,” said the statistics office.

Most experts expect new debt in Germany to fall this year. The Kiel Institute for the World Economy (IfW), for example, predicts a financing deficit of 1.9 percent.

Note: This article has been updated.