People enter a souvenir shop with placards that read: "We're closing!" and "Everything must go" on Dec 13, 2024 in Berlin, Germany. [Photo/VCG]
BERLIN - Germany's economy contracted for a second consecutive year in 2024, with inflation-adjusted GDP shrinking by 0.2 percent, official data showed.
Following a 0.3 percent drop in 2023, this marks the first back-to-back annual negative growth since the early 2000s.
Hampered by deep-seated structural problems, the outlook for Europe's largest economy remains fraught. Increasing downside risks, including those stemming from potential trade policies under the new US administration, and uncertainties surrounding Germany's upcoming snap election, could weigh on the country's economic recovery in 2025.
"Cyclical and structural pressures stood in the way of better economic development in 2024 ... The German economy contracted once again," Ruth Brand, president of the Federal Statistical Office, told a recent press conference.
Industrial output, excluding the construction sector, contracted by 3 percent year on year, following a 2 percent drop in the previous year, according to official data. Meanwhile, the services sector expanded by 0.8 percent. The situation raises alarm over a potential erosion to Germany's once dominant manufacturing base.
Carsten Brzeski, the global head of Macro at ING Research, noted that German industrial production remains some 10 percent below pre-pandemic levels.
As the traditional drivers of economic growth, export, investment and consumption all stayed under pressure in 2024. The highly export-oriented German economy saw a narrowed trade surplus, with exports falling by 0.8 percent year on year, dragged by the electrical equipment, machinery and automobile sectors, while imports saw a modest increase.
Private consumption, considered a cornerstone of recovery, grew by a mere 0.3 percent in 2024 in limited support of an upturn. The latest consumer sentiment index by the market research agency GfK stood at a dismal minus 21.3 points.
Consumer confidence has been stagnant since mid-2024, noted GfK, citing high food and energy prices and concerns over job security as factors to affect household spending.
Despite a record number of employed people in 2024, the Federal Employment Agency has noticed a labor market response to the ongoing economic downturn with unemployment rate climbing to 6 percent, up by 0.3 percentage point over the previous year.
Germany's economic vulnerabilities were exposed amid global disruptions, particularly during the time of pandemic and the Russia-Ukraine conflict. Structural weaknesses in its export-driven model are increasingly apparent.
Shi Shiwei, head of the Sino-German research center at the Beijing-based University of International Business and Economics, stressed underinvestment as a critical drag on Germany's sluggish economy.
"Years of inadequate public investment has resulted in aging infrastructure and slow progress in digitalization, significantly undermining private investment," he told Xinhua.
Rising costs and skilled labor shortages accompanying an aging population on top of a transition to renewable energy are challenging, he said. And red tape and inconsistent economic policies are further discouraging investment.
Business sentiment reflects the problems. The Munich-based Ifo Institute for Economic Research recorded its December business climate index at the lowest level since May 2020 amid growing market concerns over economic outlook.
According to Creditreform, business insolvencies in Germany surged by 24.3 percent in 2024 to 22,400, a record high since 2015. The credit agency predicts insolvencies will further increase this year, potentially nearing levels seen during the 2009 financial crisis.
Structural reforms are called for to halt the stagnation troubling the world's third-largest economy. Shi emphasized the need to prioritize improving the business and investment environment through measures including incentivizing innovation.
Germany's fiscal rule of debt brake or Schuldenbremse to cap annual structural deficits at 0.35 percent of GDP has also come under scrutiny. Shi suggested a more flexible approach of allowing increased borrowing during economic downturns. "Increased debt should flow into public investment rather than welfare programs," he added.
ING Research estimated that Germany would need additional public investment equivalent to 1.5 percent of GDP annually over the next decade to bridge the gap left by years of underfunding totalling 600 billion euros (622 billion US dollars). Otherwise, economic stagnation is likely to persist.
The International Monetary Fund (IMF) slashed its 2025 growth forecast for Germany from 1.3 percent to 0.8 percent in October. Major German think tanks recently revised their projections on Germany's 2025 economic growth to zero to 0.4 percent.
In its latest monthly report, Germany's central bank warned of the dual pressures of slowing growth and rising inflation inducing "stagflation". Geopolitical tensions, potential US trade restrictions and Germany's domestic political landscape were listed as key threats to economic stability.
US President Donald Trump has vowed to impose high tariffs on all imports. German exports, including those from Germany's economic pillar of the automobile industry, are particularly exposed to such trade measures.
Clemens Fuest, president of the ifo Institute, described Trump's tariff policies as protectionist and a direct threat to global trade, warning that German exports to the United States could thus drop by 15 percent.
In the first 11 months of 2024, Germany's trade surplus with the United States hit a record of 65 billion euros (67 billion dollars), surpassing the previous year's total. Such an imbalance could provoke harsher retaliatory measures, including punitive tariffs from the US side, analysts from the German newspaper Handelsblatt said.
Cathryn Cluever Ashbrook, a transatlantic expert at Germany's independent foundation Bertelsmann Stiftung, believes that Trump will quickly act with threatened tariffs and possible market restrictions. Through tax incentives and disrupting supply chains with tariffs, Trump's policies aim to "encourage German firms operating in the US to become American entities".
The German central bank estimated that US-related factors, particularly tariffs, could reduce Germany's GDP by as much as 1.2 percent over the next three years, representing the largest risk to economic recovery.
Domestically, Germany's snap election scheduled for February injects uncertainty to its economic recovery.
Sharp divisions between ruling party hopefuls over such major issues as taxation and debt reform could lead to severe political disputes, further clouding Germany's economic prospect, Shi said.
