Germany’s economy is facing a tough time, according to a monthly report by the Bundesbank, Europe’s biggest economy. The report says that Germany is likely in recession due to weak external demand, cautious consumers, and high borrowing costs that are holding back domestic investment. Germany’s economy has been struggling since Russia’s 2022 invasion of Ukraine, which has pushed up energy costs. The country’s vast, industry-heavy economy is now in its fourth straight quarter of zero or negative growth, which is affecting the entire eurozone.
The Bundesbank report predicts that there is still no recovery for the German economy, and output could decline again slightly in the first quarter of 2024. If this happens, the German economy would be in a technical recession for the second consecutive time. This weak performance has raised questions about the sustainability of the German economic model. Critics argue that much of its energy-reliant heavy industry is now being priced out of international markets, warranting an economic transformation.
The government, however, has pushed back on gloomy projections, arguing that it is merely a perfect storm of high energy costs, weak Chinese demand, and rapid inflation that temporarily holds back growth but does not fundamentally question economic strategy.
The Bundesbank expects the weakness to persist. Foreign industrial demand is trending down, and firms are holding back investment because financing costs have risen sharply since the European Central Bank pushed up interest rates to a record high to combat inflation. High nominal wage growth is also impacting firms, and strikes in key sectors, such as transport, could also weigh on growth in the quarter.
The Bundesbank report notes that the disruption of shipping in the Red Sea will not have a significant impact because there is plenty of spare capacity in shipping, and freight costs are only a minor part of the overall cost of goods.
While the outlook is weak, the bank said it expects no major deterioration in the labor market, which has insulated the economy so far, and Germany was not facing a broad-based, prolonged recession. The report concludes that “the weak phase in the German economy that has been ongoing since the beginning of the Russian war of aggression against Ukraine will thus continue.”