Germany Braces for Tough 2024: Growth Forecast Slashed to 0.2%

Germany, Europe’s largest economy, is facing a bleak outlook for 2024, as it struggles with the fallout of Russia’s full invasion of Ukraine, high inflation, labor shortages and weak global demand.

The German government on Wednesday sharply cut its growth forecast for 2024 to 0.2%, down from 1.3% previously, and warned that the country was in “tricky waters” and could slip into a recession.

“The German economy is in a very specific situation,” Economy Minister Robert Habeck said at a news conference. “We are dependent on Russian gas, we are an export-oriented economy and we have a structural problem with the lack of workers.”

Mr. Habeck, a member of the Green Party, which is part of the ruling coalition with the Social Democrats, said the government was taking measures to support the economy, such as extending energy subsidies, boosting public investment and easing immigration rules.

But he also acknowledged that the government had limited room to maneuver, as it faced a constitutional debt brake, high interest rates and rising public discontent over the cost of living.

Germany narrowly avoided a recession at the end of 2023, when its gross domestic product shrank by 0.3% in the fourth quarter, after a marginal contraction in the third quarter.

The main drag on the economy was the surge in energy prices, which soared after Russia’s full invasion of Ukraine two years ago, disrupting gas supplies to Europe and triggering a diplomatic crisis.

Energy prices pushed inflation to a record high of 11.6% in October 2023, before easing to 6% for the year as a whole and 3.1% in January 2024, thanks to the decline in wholesale energy prices and the introduction of energy support measures.

But the high inflation eroded the purchasing power of consumers, who also faced higher taxes and social security contributions. Private consumption, which accounts for more than half of the German economy, suffered a sharp decline in 2023.

The other main pillar of the economy, exports, also faltered, as global trade was hit by geopolitical uncertainty, supply chain disruptions and weaker demand from China, Germany’s largest trading partner.

Investment, especially in construction and energy-intensive sectors, was also depressed by high building and borrowing costs, labor shortages and regulatory hurdles.

The German central bank, the Bundesbank, warned this month that the economy could contract again in the first quarter of 2024, putting the country into a technical recession, defined as two consecutive quarters of negative growth.

The European Commission, the executive arm of the European Union, also expects Germany to lag behind the rest of the eurozone, which is projected to grow by 1.5% in 2024 and 2.1% in 2025.

The German government is more optimistic about 2025, when it expects the economy to rebound by 1.2%, in line with the commission’s forecast.

But analysts say that the recovery will depend on several factors, such as the evolution of the pandemic, the resolution of the Ukraine crisis, the stabilization of energy prices and the implementation of structural reforms.

Some economists also argue that Germany needs to loosen its fiscal policy and increase its public spending, especially on infrastructure, education and innovation, to boost its long-term growth potential and competitiveness.

“Germany has been living off its past successes for too long,” said Marcel Fratzscher, president of the German Institute for Economic Research in Berlin. “It needs to invest more in its future, in its people and in its green and digital transformation.”