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Germany’s economy contracted by 0.2% in 2024, marking its second consecutive year of decline after a 0.3% contraction in 2023, according to data released by the Federal Statistics Office. The economy also shrank by 0.1% in the final quarter of the year, showing limited signs of recovery amidst ongoing economic challenges.
Key factors contributing to Germany’s downturn include increasing global competition, particularly from China, high energy costs, elevated interest rates, and uncertain economic prospects. These challenges have transformed Germany from Europe’s economic powerhouse into an underperformer compared to its major eurozone peers, making it the only major European economy expected to have contracted last year.
Disagreements over how to address the economic challenges contributed to the collapse of Chancellor Olaf Scholz’s three-party coalition in 2024. Economic recovery remains a top priority for German voters ahead of the federal election scheduled for February 23, 2025.
Germany’s export-oriented economy suffered from weak global demand, with exports falling 0.8% in 2024 compared to the previous year. Prospects for exports could worsen under the trade policies of U.S. President-elect Donald Trump, who has threatened to impose sweeping tariffs, according to economist Jens-Oliver Niklasch of LBBW.
On the positive side, consumer spending increased by 0.3% in 2024, supported by slower inflation and rising wages, which boosted purchasing power. However, the country recorded a budget deficit of €113 billion ($116.44 billion) in 2024, up by €5.5 billion from the previous year, with the general government deficit remaining at 2.6% of GDP.
Outlook for 2025
The contraction in Germany’s economy during the final quarter of 2024 has raised concerns about the potential for a recession if the first quarter of 2025 also sees negative growth. Preliminary figures for Q4 2024 are set to be revised on January 30, while policymakers and businesses await clarity on the country’s economic trajectory post-election.
The European Central Bank is expected to cut interest rates three to four times in 2025. However, economist Joerg Kraemer noted that these rate cuts may provide limited relief for German businesses without a “real restart in economic policy.”
