Germany to be Europe’s worst-performing large economy this year

Germany gets sick again:

Following reunification in the 1990s, Germany’s economy was labeled by commentators as the “kranke Mann Europas”, the “sick man of Europe”. But after a series of government-led reforms, the nation converted itself into Europe’s economic dynamo, with growth keeping pace with the United States between the mid-2000s and mid-2010s. However, the economists polled by FocusEconomics expect Germany’s economy to contract 0.3% in 2023 and to grow a meager 0.9% in 2024—the worst performances in the G7. Several factors have contributed to this change in fortunes.

Thriftiness:

Our panelists expect private and government spending to dip this year. The decline in consumption is rooted partially in a culture of thrift: In Q1 2023, German households saved 20% of their income, the most in the Euro area, meaning that easing inflation and rising wages have not translated into as much extra spending as in other nations. Meanwhile, government measures to cap energy price rises have been less generous and introduced later than in other Euro area countries, allowing consumption to falter.

A loss of Russian gas:

Germany relied upon Russia for over 50% of its gas imports before the war. The war in Ukraine has forced Germany to import from pricier providers, hurting the competitiveness of its gas-guzzling industry and stoking consumer price inflation. Our panelists expect export growth to slow to 0.5% this year from 3.4% in 2022.

Export and import dependence:

Exports made up 50% of Germany’s GDP in 2022, far higher than the United States (11%), the UK (33%) or France (34%). Consequently, weaker foreign demand as a result of lower world GDP growth this year has hit Germany especially hard. As the world economy recovers, Germany’s GDP growth should too, but growth rates will remain lower than before the war in Ukraine.

Insight from our analysts

Another drag has been competition from and tensions with China, as analysts at Fitch Solutions outline:

“Greater competition from China in international trade will be a motivator for Berlin and its western peers to coordinate on a more unified stance towards Beijing. Since 2020 Chinese autos production has surged with subsidy support from Beijing (with particularly strong growth in electric vehicles), becoming a net exporter of vehicles. This shift has already begun to weigh on Germany’s external balances.”

Germany’s dependence on old industries may be another drag ahead, as analysts at EIU explain: “

Sustained higher input costs and rising subsidy-driven global competition for investment raises major questions over the future competitiveness of key industrial sectors such as chemicals and automotive.”

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