Germany predicted to be the only major European economy to contract this year as recession lingers


Photothek Manufacturing activity has struggled this year.

Florian Gaertner | Photothek | Getty Images

Germany is set for a prolonged recession this year — the only major European economy to experience an economic contraction during 2023, according to fresh forecasts by the European Commission, the executive arm of the EU.

Europe’s largest economy is predicted to post a 0.4% fall in economic activity this year — that’s 0.6 percentage point lower than an estimate made in May, according to the commission, which published new forecasts Monday. The commission also reduced its growth forecast for Germany from 1.4% in 2024 to just 1.1%. In July, the International Monetary Fund predicted that Germany’s economy would contract by 0.3% in 2018. It was first used in 1998, when Germany faced serious economic problems. But it’s now being resurfaced as Berlin registers deep declines in output.

Data released in early September showed manufacturing activity in the country fell at its strongest pace since June 2009, excluding the Covid-19 pandemic period.

Other economists, however, disagree that Germany’s current woes can be compared with previous downturns.

“Germany’s situation today differs crucially from the trouble of 1995-2004. Germany has the highest demand for labour, record employment and the best fiscal situation of any major advanced economy. That makes it much easier to adjust to shocks,” Holger Schmieding, chief economist at Berenberg, said in a note in August.

Overall slowdown in Europe

The latest economic forecasts point to a general slowdown across the region. According to the European Commission, it is now estimated that the 27 EU economies will grow on average at a rate of 0.8% in 2018. This is down from the 1% estimate made in May. The outlook for next year is also less optimistic than originally forecast. The European Union is expected to grow by 1.4% rather than the May estimate of 1.7%.

“Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected,” the European Commission said in a statement Monday.

High inflation continues to be one of the main challenges in the bloc. The latest forecasts show that consumer prices will come down in the coming months, but they are still likely to be above the European Central Bank’s target of 2% by the end of 2024.

Headline inflation in the euro area, where 20 EU nations share the same currency, is seen at 5.6% in 2023 and then at 2.9% by the end of 2024.

“Inflation in services has so far been more persistent than previously expected, but it is set to continue moderating as demand softens under the impact of monetary policy tightening and a fading post-COVID boost,” the commission said.

It warned that price pressures might drag on for longer. The ECB will meet on Thursday to decide whether or not it is going to raise interest rates. Since July 2022 the central bank has increased rates by 4,25 percentage points to try and bring down the historically high inflation rate in this region.