Jakarta, CNBC Indonesia – Economic weakness occurred in Germany, Monday (15/1/2024). Expensive energy, high interest rates and falling overseas demand are taking a toll on Europe's export giant.
The federal statistics agency, Destatis, said output contracted by 0.3% year-on-year (yoy). The country is also likely to experience a decline in gross domestic output (GDP) of 0.3% in the final quarter of this year.
The Central Bank also revised third quarter (Q3) data from a contraction of 0.1% to stagnation. This means Germany avoided a year-end technical recession due to negative growth for two consecutive quarters.
It should be noted that the German economy has faced serious challenges since Russia's war in Ukraine which caused inflation, especially energy costs, to soar. This price spike contributed to a sharp decline in Germany's energy-hungry manufacturing sector while the construction sector was also hit hard.
Increased competition with China, which was once the main destination for German-made goods, is also hampered by other reasons. Not to mention, the aggressive increase in European zone interest rates to control inflation has further added to Germany's woes.
In fact, weak economic performance was widely expected. The International Monetary Fund (IMF) estimates that Germany will be the only developed country not to experience growth in 2023.
“Despite the recent price decline, prices remain high at all stages of the economic process and hinder economic growth in 2023,” said Destatis official Ruth Brand.
“Unfavorable financing conditions due to rising interest rates and weakening domestic and foreign demand also have a negative impact,” he said.
Moderate Recovery
On the other hand, a moderate recovery is expected in 2024. Germany's central bank Bundesbank recently predicted growth of 0.4%.
“We see a silver lining for the economy in 2024,” said KfW Chief Economist Fritzi Koehler-Geib.
“Thanks to strong real wage growth, private consumption in particular is likely to pick up again. Along with the expected recovery in export demand, gross domestic product is likely to grow,” he added.
However, ING bank economist Carsten Brzeski is less optimistic. He pointed to new uncertainties stemming from the German government's current budget disruptions and shipping delays in the Suez Canal due to conflicts in the Middle East.
“Looking ahead, at least in the first months of 2024, many of the recent headwinds to growth are still present and, in some cases, will have a stronger impact than in 2023,” Brzeski said.
He predicted that GDP would shrink again this year, which would be the first time since the early 2000s that Germany had experienced a two-year recession. Even so, it could be that the recession is a shallow recession.
Concerns about slowing exports and a decline in the manufacturing sector, coupled with a shortage of skilled labor, are starting to raise fears of “deindustrialization” in Germany.
Chancellor Olaf Scholz's government, whose popularity has slumped in opinion polls, has sought to address those concerns by pledging to make massive investments in a transition to green energy and infrastructure modernization.
But a surprise court ruling late last year decimated the government's budget by billions of euros, upending the government's spending plans and leaving Scholz and his coalition partners scrambling for savings. Anger over Berlin's proposal to cut some agricultural subsidies prompted farmers to stage tractor blockades across the country last week, culminating in huge demonstrations in Berlin Monday.
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