Federal Chancellor Olaf Scholz (Social Democratic Party, Right), Federal Minister for Economic Affairs and Climate Protection Robert Habeck (Union 90/Greens) and Federal Finance Minister Christian Lindner (FDP) focus on the start of the budget debate week.
Michael Kappeler | Image Alliance | Getty Images
There is little good news about the German economy. And the latest economic data doesn’t change that much.
Several key data for 2023 were released last week, namely factory orders, exports and industrial production. These data pointed to a weak economy at the end of the year, and the question of Germany becoming the “sick man of Europe” has once again surfaced.
“The data confirms that German industry is still in recession,” Berenberg chief economist Holger Schmieding told CNBC.
Industrial production fell by 1.6% quarterly in December, and the overall decline in 2023 was 1.5% compared with the previous year. Exports, the main cornerstone of the German economy, fell 4.6% in December and were down 1.4% for the year, or 1.562 trillion euros ($1.68 trillion).
Meanwhile, factory orders data looked promising at first glance, rising 8.9% in December compared with November.
But Franziska Palmas, senior European economist at Capital Economics, told CNBC that the increase “isn’t too comforting,” explaining that it was thanks to Several large orders, and these orders tend to fluctuate. “Orders, excluding large-scale orders, have actually fallen to post-pandemic lows,” she added.
Overall in 2023, factory orders fell 5.9% from the previous year.
Schmieding said that while December’s “hard” data did not yet indicate that a recovery was imminent, the latest PMI report suggested that the worst for the manufacturing sector may soon be over.
“While 45.5 is still below the 50 mark that separates growth from contraction, it has edged up to an 11-month high,” he noted.
Erik-Jan van Harn, global economic and market macro strategist at Rabobank, told CNBC that even so, economic growth is unlikely to happen quickly.
“Our German industrial activity is still far from pre-pandemic levels,” he explained. “We still expect a small contraction in the first quarter, but probably not as severe as in the fourth quarter,” van Harn said. ” He expects growth to pick up slightly but expects growth to be flat for the full year.
Others are more pessimistic about the German economy.
Jörg Kramer, chief economist at Commerzbank, told CNBC: “We stick to our forecast that the German economy as a whole will shrink by 0.3% in 2024.”
This is broadly in line with the performance of the German economy in 2023, when it shrank by 0.3% annually, according to data released by the Federal Statistical Office last month. Data also showed that gross domestic product fell by 0.3% in the fourth quarter, but Germany still managed to avoid a technical recession, which was characterized by two consecutive quarters of negative growth.
That’s because the statistics office found a stagnation rather than a contraction in the third quarter of 2023. But if the economy contracts in the first three months of 2024 as expected, Germany will indeed fall into recession.
“Businesses have a lot to digest – rising global interest rates, higher energy prices, fewer tailwinds from China and the erosion of Germany as a place to do business,” Cramer explained of the reasons for the recession.
Some of these headwinds could also play a key role in weaker export data, Rabobank’s van Haan noted. He said factors such as cheap energy from Russia, strong demand from China and a surge in global trade had boosted German exports for decades “but are now declining.”
Experts say that in addition to pure economics, domestic and international politics may also pose risks to the country’s economy.
Germany’s coalition government has been under pressure after a budget crisis after Germany’s Constitutional Court ruled that it was illegal to reallocate unused debt during the pandemic to current budget plans.
This leaves a €60 billion gap in the Union’s budget plans, and since funds are allocated over the next few years, the crisis is likely to resurface at the end of the year when budget planning for 2025 begins.
Voter satisfaction with the government is also low, with the opposition Christian Democrats currently leading the polls, followed by Germany’s far-right Alternative for Germany party. However, support for the latter has declined in recent weeks Protests against the far-right have swept the country, with hundreds of thousands of Germans taking to the streets.
Elsewhere, the U.S. election could also make things more difficult, Schmieding said.
“Trump’s trade war threats could have a significant negative impact on Germany,” he said. However, he noted that this would of course depend on the outcome of the election and might not be fully developed until 2025.
