According to an initial estimate published on Monday, German output declined by 0.3 percent last year due to high inflation, rising rates of interest and increased energy costs. This made Germany’s largest economy, Europe, one of the worst performers in the entire world.
The German economy will decline in 2023, adding to a dismal start to the new year. This has been compounded by the nationwide strike on working hours as well as disruptive protests from farmers against fuel subsidy cuts.
Ruth Brand, President of the Federal Statistics Office, said that “overall economic growth in Germany will falter in 2023 due to an environment which continues to be marked with multiple crises.”
The statistics office stated that the gross domestic product (GDP) was still higher than pre-pandemic levels, despite last year’s contraction following two years of recovering output. It is up by 0.7 percent from 2019.
In conjunction with data released on Monday that showed the eurozone’s industrial production declined for the third month in a row in November, the German figures were interpreted by economists as indicating an contraction in the single currency bloc at the end of the fourth quarter.
Melanie Debono is an economist with Pantheon Macroeconomics. She said that the risks of her forecast of a 0.1% contraction in the eurozone’s economy for the last quarter of 2013 were “directly to the down side”.
Germany had the worst performance of any major economy last year. The IMF recently predicted advanced economies would grow on average by 1.5 percent in 2023 while emerging markets and developing economies will expand 4 percent.
IMF predicted that the US economy expanded by 2.1 percent last year. The eurozone grew by 0.7 percent, and the UK by 0.5 percent. This shows how Germany’s large export-focused manufacturing industry has been affected by the loss in cheap Russian energy, and a slower demand from China.
According to EU data published on Monday, a fall in German and Italian industrial output contributed to a decline of 0.3 percent in the eurozone’s industrial production from a previous month. This brings the decline for the year to 6.8 percent.
The German statistical office reported that the GDP fell by 0.3 percent in the last three months of the year compared to the previous quarter, when the output was stagnant. It added that “the data base of this estimate is not as complete as that of the quarterly calculation and there is therefore a greater degree of uncertainty”.
German retail sales, exports and industrial production all fell last year. Households were hit by the biggest surge in the cost of living for a generation while the country’s sprawling manufacturing sector suffered from high energy costs, weak global demand and rising financing costs.
The statistics office reported that household consumption dropped by 0.8 percent last year. This is 1.5 percent below the pre-pandemic level. Gross value added in the industry (excluding construction) decreased by 2 percent last year. As pandemic-related spending was phased out, government expenditures declined by 1.7%.
According to the OECD the growth in the country will pick up this year to 0.6 percent, making it one of the weakest large economies in the world. Since the government cut spending plans in order to fill a €60bn budget hole left by a court ruling against funds off-balance, several analysts have lowered their forecasts.
Andrew Kenningham is an economist with Capital Economics. He predicts zero growth in German GDP by 2024.
The German economy is expected to see a rise in consumer spending this year, as the purchasing power of households recovers thanks to the continued growth in wages.
German inflation dropped from over 11 percent in late 2022 down to 2.3 percent last November. Consumer prices remain more than 20% higher than before the pandemic, and inflation increased to 3.8% in December following the phase-out of energy subsidies.
Brand said that despite recent price drops, prices were high at every stage of the economic process. This dampened economic growth.
The European Central Bank increased its deposit rate from 4% to 4% to combat inflation. This has led to a rise in borrowing costs that is the highest in more than a decade.
Brand said that “unfavourable financing conditions due rising interest rates, and weaker domestic as well as foreign demand took their toll.”
The eurozone data for trade showed that exports rose by 1% in November compared to the previous month. Imports fell by 0.6 %. Eurozone exports are still down 4.7% compared to a year ago, but imports have dropped 16.7%, due to the drop in energy and food prices.