- Europe’s largest economy is forecast to shrink by 0.4% this year – 0.6 percentage points less than forecast in May.
- The European Commission also cut its growth expectations for Germany in 2024 to 1.1% from 1.4%.
- The latest economic forecasts point to a general recession across the region.
A metalworker is depicted grinding metal in a forge in Klinton, Germany. Manufacturing activity has struggled this year.
Florian Gertner | Phototheque getty images
Germany is set for a prolonged recession this year – the only major European economy to experience an economic contraction through 2023, according to the latest forecasts from the European Commission, the EU’s executive branch.
Economic activity in Europe’s biggest economy is expected to decline by 0.4% this year – 0.6 percentage points less than forecast in May, according to the Commission, which published new forecasts on Monday. The institution also cut its growth expectations for Germany in 2024 to 1.1% from 1.4%.
With the German economy struggling in the wake of Russia’s invasion of Ukraine, Berlin must, very quickly, end years of energy dependence on the Kremlin. The International Monetary Fund said in July that Germany could contract by 0.3% this year.
Top economists have dubbed the traditional economic superpower the “sick man of Europe.” The concept was coined in 1998 when Germany faced deep economic challenges. But now it is coming to the fore again as Berlin has seen a sharp decline in production.
Data released in early September showed that manufacturing activity in the country fell at the strongest pace since June 2009, not including the period of the COVID-19 pandemic.
However, other economists disagree that Germany’s current troubles are comparable to previous recessions.
Holger Schmieding said, “The situation in Germany today is quite different from the problem of 1995-2004. First, Germany has record employment, high demand for labor and the most comfortable fiscal situation of all the major advanced economies. This makes it more vulnerable to shocks. It becomes very easy to adjust to.” Berenberg’s chief economist said in a note in August.
The latest economic forecasts point to a general recession across the region. The 27 EU economies are expected to grow at an average pace of 0.8% this year. This is less than the 1% estimate made in May.
Talking about next year, the picture is even more disappointing than previously estimated. The EU is expected to grow 1.4% instead of the 1.7% forecast in May.
“Weakness in domestic demand, especially consumption, shows that high and still rising consumer prices for most goods and services are weighing more heavily than expected,” the European Commission said in a statement on Monday.
High inflation remains one of the main challenges in the bloc. The latest forecasts suggest consumer prices will ease in the coming months, but they are still likely to remain above the European Central Bank’s target of 2% by the end of 2024.
Headline inflation in the euro zone, where the 20 EU countries share the same currency, is seen at 5.6% in 2023 and then 2.9% by the end of 2024.
“Inflation in services has remained higher than previously expected, but will continue to moderate due to softening demand under the influence of monetary policy tightening and the slowing post-Covid boom,” the Commission said.
It warned that price pressures could persist for a long time. The ECB will meet on Thursday and announce whether it is raising interest rates again. The central bank has raised rates by 4.25 percentage points through July 2022 in an effort to ease historically high inflation in the region.