Why Germany’s economy is sliding into recession - Bloomberg

Germany is suffering a mild recession and output across the whole of 2024 will be flat, according to a Bloomberg survey.

Poll participants, including bank analysts, predict gross domestic product will shrink by 0.1% in the third quarter, following a surprise contraction of the same scale in the second. 

A month ago, analysts were forecasting the economy flatlining between July and September, not shrinking.

And analysts also expected the German economy to have a tiny 0.1% expansion in the full year - a more upbeat assessment than the assessment from the German government, which last week slashed its forecast to a full-year contraction of 0.2%.

“Industry remains the Achilles heel,” Erik-Jan van Harn, an analyst at Rabobank, told Bloomberg. “There’s no clear catalyst for a turnaround. A bottoming out is the best case scenario for now.”

For 2025, analysts expect 0.8% growth compared with 1% before. The government’s new forecasts envisage growth of 1.1%.

Germany’s “economic weakness likely continued in the second half of 2024, before growth momentum gradually increases again next year,” the Economy Ministry said in its own report, adding that a “technical recession” probably occurred in the second and third quarters.

Why is the German economy in such trouble? 

The German economy, once the powerhouse of Europe, finds itself mired in a quagmire of stagnation and uncertainty.

Chancellor Olaf Scholz's coalition government faces a daunting task as the country grapples with a perfect storm of challenges that threaten to undermine its economic foundations.

Shrinking workforce

Germany's demographic challenges are exacerbating its economic woes. An ageing population and a shrinking workforce are putting immense pressure on public finances and productivity. The country's sluggish adoption of digitalisation and chronic underinvestment in infrastructure further compounds these issues.

Political turbulence 

Political infighting within the governing coalition has hampered efforts to address economic challenges effectively. The government's hands are tied by constitutional spending limits, making it difficult to implement ambitious economic stimulus measures.

Soaring energy costs

At the heart of Germany's troubles lies a confluence of factors. The country's heavy reliance on exports has left it vulnerable to global trade fluctuations, while its energy-intensive industries have been hit hard by the loss of cheap Russian gas following the invasion of Ukraine. This has led to soaring energy costs and rampant inflation, squeezing household budgets and dampening consumer spending.

Construction sector in crisis

The construction sector, a key pillar of the German economy, is in crisis. High interest rates, skilled labour shortages, and bureaucratic red tape have plunged the industry into turmoil, with insolvencies rising by over 20% in 2023.

André Kasimir, owner of Kasimir Bauunternehmung, told the BBC, "The government does not have a clue what to do to make it easier for us to build and to live".

Sick man of Europe?

As Germany finds itself once again in recession, the country faces a critical juncture. Without bold reforms to boost productivity, streamline bureaucracy and address its demographic challenges, it is Europe’s largest economy - not Britain - which risks becoming “the sick man of Europe”.

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