German economy shrinks surprisingly
The German economy is stuck in neutral. Economists were expecting a slight growth for the second quarter, but their expectations were dashed. Instead, the gross domestic product (GDP) decreased slightly compared to the previous year.
The German economy surprisingly shrank in the second quarter of 2024. The GDP fell by 0.1 percent compared to the previous quarter, according to preliminary data from the Federal Statistical Office. Economists had expected a growth of 0.1 percent. In the first quarter, the GDP had grown slightly by 0.2 percent.
The statisticians cited weak investments as the reason. Last year, Germany slipped into a mild recession with a price-adjusted decline of 0.2 percent. The export-oriented German economy felt the cooling of the global economy, as well as the soaring energy prices and rapidly rising interest rates. Furthermore, there is a shortage of skilled workers, and companies complain about excessive bureaucracy. "Bloodless growth"
The unexpected decline in GDP once again shows that there is no significant recovery in Germany, commented Commerzbank chief economist Jörg Krämer. "The three consecutive drops in the Ifo business climate index and the weakness of other economic indicators suggest at most a 'bloodless growth' for the second half of the year."
The easing of the previous interest and energy price increases has not yet translated into an economic recovery.
Only a Mini-Recovery is Possible
A swift recovery is not in sight for the current year. In the first quarter, Europe's largest economy only grew by 0.2 percent. And for the full year, economists see only a mini-growth: For example, the Council of Experts for the Assessment of Overall Economic Development expects a plus of 0.2 percent - slightly less than the federal government's forecast (0.3 percent).
There is plenty of headwind for the German economy: China, the growth driver on the world markets, has lost momentum, and the number of corporate insolvencies is increasing in Germany. A first interest rate cut by the European Central Bank in June has not yet brought significant improvement for the German economy.
Tail-ender among the G7
The International Monetary Fund predicts only a growth of 0.2 percent for Germany in 2024 - the weakest rate among the leading Western G7 industrialized countries. In contrast, the IMF expects a plus of 3.2 percent for the world economy.
A debate about the location of Germany has long been raging. Important sectors are also struggling: While the chemical industry is suffering from relatively high energy prices, the automotive industry is grappling with the transition to e-mobility, and the construction industry has lost momentum after the real estate boom. To support the economy, the federal government has introduced relief measures for companies, including improvements in tax depreciation and an expansion of the research allowance.
Ifo Index Does Not Bode Well
The latest indicators also point to only a weak recovery this year. The business climate has unexpectedly deteriorated further. The Ifo business climate index fell in July - the third consecutive decline of Germany's most important economic indicator. "The German economy is stuck in the crisis," commented Ifo President Clemens Fuest.
At least, the Federal Bank expects a somewhat stronger economy in the current third quarter. Substantially rising wages, which support private consumption, a decreasing inflation, and a robust labor market should contribute to this. However, the weakness in demand for industrial products has not been entirely overcome.
Therefore, the growth of the economic output may fall slightly short of the Federal Bank's expectations from June. At that time, they had forecast a growth of 0.3 percent for the current year. It is not until 2025 that the Federal Bank expects the prospects to improve, with a growth of the German economy of 1.1 percent.
Despite the relief measures introduced by the federal government, the GDP growth for Germany in 2024 remains weak, with the International Monetary Fund predicting a meager 0.2% increase. This slow growth stands in stark contrast to the rest of the G7, with the IMF anticipating a 3.2% growth for the world economy as a whole.
The German economy's sluggish performance can be partially attributed to the persistent decline in the Ifo business climate index, which has dropped for the third consecutive month, as reported by Ifo President Clemens Fuest, suggesting the economy remains stuck in crisis.
