German economy shrank by 0.3% in final quarter of 2023

The German economy shrank in the fourth quarter of 2023, with gross domestic product (GDP) falling by 0.3% compared to the previous quarter, according to preliminary government data released on Tuesday.

The figure was adjusted for price, calendar and seasonal affects, the Federal Statistical Office said. The preliminary figures matched earlier estimates from the agency.

Germany's economy, the largest in the European Union, fell into recession in 2023, shrinking by an estimated 0.3% during the full year as the country was battered by high inflation, high interest rates and sluggish global demand for German exports, including in China.

Economists largely expect 2024 to be another difficult year for the German economy.

They predict it will likely shrink again in the first quarter, as the country struggles with numerous challenges, including transport strikes and disruptions to shipping through the Red Sea and the Suez Canal.

A budget crisis also forced Germany's government to cut spending and look for ways to raise tax revenue.

Several economic research institutes have recently lowered their overall forecasts for the German economy in 2024 and are not ruling out another year of recession.

"The German economy is stuck in recession," Clemens Fuest, the president of the influential Munich-based ifo Institute, said recently.

"There are the government's austerity measures, but also ongoing strikes by train drivers and disruptions to supply chains as a result of the military conflict in the Red Sea," said ING chief economist Carsten Brzeski.

Economist Timo Wollmershäuser, also of ifo, said that companies are complaining of declining demand in almost all sectors of the economy.

In addition, the economy has been hit by other unexpected headwinds in recent weeks: "These include the high sickness rate, the strikes at Deutsche Bahn and the unusually cold and snowy January," Wollmershäuser said.

Hopes for the current year rest above all on the possibility that German households might start spending more. Forecasts suggest inflation could continue falling, helping boost real wages.

"Thanks to strong real wage growth, private consumption in particular is likely to pick up again," said KfW Chief Economist Fritzi Köhler-Geib.

But some recent data has clouded those hopes. A recent survey from the consumer research institute GfK and the Nuremberg Institute for Market Decisions (NIM) showed consumer sentiment declined again.

The survey found that crises and wars as well as persistently high inflation have continued to unsettle consumers.