Germany’s economy, the largest in Europe, contracted for the second year in a row in 2024, official data showed Wednesday, underscoring the challenges facing the region as it tries to get economic growth back on track.
Germany’s gross domestic product fell 0.2% last year, according to the country’s Federal Statistical Office, following a contraction of 0.3% in 2023.
It’s the first time since the early 2000s, when Germany was grappling with high unemployment, that the economy has shrunk for two years in a row, according to Carsten Brzeski, global head of macroeconomics at pan-European bank ING.
The data comes just weeks ahead of a crucial snap election, called after Germany’s governing coalition collapsed late last year over disagreements about how to bolster the country’s weak economy.
“Hope is that any new German government would decide on a longer-term plan for economic reforms and investments,” Brzeski wrote in a note.
The troubles facing the German economy are captured by the crisis at the country’s largest manufacturer, Volkswagen. In December, the automaker announced sweeping changes to operations in its home country, including more than 35,000 job cuts and plans to shift some production to Mexico.
Like Volkswagen, Germany faces high labor costs, weak productivity growth and competition from China. It can also no longer rely on red-hot demand for its exports in the world’s second-largest economy, which is increasingly producing locally many of the goods that it used to import from Europe.
According to Brzeski, German industrial production remains about 10% below its pre-pandemic levels. Possible higher tariffs from the incoming US administration could make the situation worse because of the potential impact on German exports and “the effect on German investments if companies were to move production to the US,” he said.
Germany’s central bank said last month that economic stagnation was set to continue this year, with GDP “only beginning to make a slow recovery over the course of 2025.”
The GDP data bodes ill for the wider European economy, which has struggled to grow significantly after the pandemic and will also potentially face a more fractious relationship with one of its biggest trading partners, the United States.
Data from the European Union’s statistics office Wednesday showed that industrial production in the 20 countries that use the euro increased slightly in November compared with October. Still, it remains 9% below its level seven years ago, partly as a result of energy prices kept high by Russia’s full-scale invasion of Ukraine, according to Capital Economics.
“Surveys suggest that production will remain subdued over the coming months,” the consultancy’s Europe economist Adrian Prettejohn wrote in a note. “Moreover, the structural headwinds facing Germany’s auto sector will weigh on eurozone industrial production for some time yet.”
