Daily Management Review

Germany's GDP Shrank By 0.3% In 2023, But It Avoided Recession


Germany's GDP Shrank By 0.3% In 2023, But It Avoided Recession
Due to ongoing inflation, rising energy costs, and sluggish international demand, the German economy shrank in 2023 but managed to stave off a recession by the end of the year.
According to data released on Monday by the Federal Statistics Office, the GDP decreased by 0.3% in 2023.
"Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises", said Ruth Brand, president of the statistics office, on Monday in Berlin.
The GDP fell for the entire year, as predicted by analysts surveyed by Reuters.
"Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth," Brand said. "Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll."
"The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year," said Andrew Kenningham, chief Europe economist at Capital Economics.
While there may be some respite for households due to the recent decline in prices, Kenningham predicted zero GDP growth in 2024 and predicted a contraction in corporate and residential investment, a significant slump in building, and tighter government fiscal policies.
The German economy did not continue its recovery from the steep economic decline seen in the pandemic year of 2020, but GDP was 0.7% higher in 2023 than in 2019, the year before the COVID-19 epidemic hit.
"It is worrying that the German economy has hardly grown at all since the outbreak of coronavirus," Commerzbank's chief economist Joerg Kraemer said. "This is rare and brings back memories of the years following the bursting of the stock market bubble at the start of the millennium."
With the exception of construction, industry's economic performance fell by 2.0% in 2023 as a result of the energy supply sector's significantly decreased output, while the services sector's economic activity helped to boost the overall economy.
In 2023, the construction industry recorded 0.2% growth. The industry was severely affected by deteriorating financing circumstances, ongoing high building prices, and a shortage of competent personnel.
Based on price adjustments, household consumption decreased by 0.8% in 2023 compared to the previous year, while government spending decreased by 1.7%.
In2023, despite declining prices, foreign commerce fell, with imports contracting 3.0% and exports falling 1.8% year over year due to the slowing expansion of the world economy and weak local demand.
As a result, exports and imports were in balance, supporting the GDP.
The German economy contracted by 0.3% in the last quarter of 2018 in comparison to the prior quarter.
In the wake of the statistics office's upward revision, the largest economy in the euro zone shrank in the third quarter when compared to the preceding three months.
The German economy avoided a recession, which is generally defined as two consecutive quarters of contraction, thanks to the stagnation in the third quarter.
"Some take comfort in the fact that the economy is 'only' stuck in stagnation and has avoided a more severe recession. But this should be no reason for any complacency," said Carsten Brzeski, global head of macro at ING.
According to the economist, many of the current growth-stifling factors will persist into 2024, if not stronger than in 2023, at least in the initial months of the year.
"The risk that 2024 will be another year of recession is high," Brzeski said.