Germany’s recession fears return ahead of election
The German economy has displayed worrying signs of contraction, sparking renewed fears of a recession as the nation faces significant political uncertainty in the approach to its upcoming snap election. Germany’s gross domestic product (GDP) saw a decline of 0.2% in the fourth quarter compared to the previous quarter. These figures, released by the statistics office, come as a surprise to many analysts who had anticipated only a marginal decline of 0.1% quarter-on-quarter.
This downturn has not been isolated to Germany alone; the euro zone’s two largest economies, Germany and France, both reported contractions in the fourth quarter, while Italy’s economy stagnated. Should Germany’s economy continue to shrink in the first quarter of 2025, the country will officially enter a recession, as a recession is typically defined by two consecutive quarters of economic contraction.
Leading indicators such as the Ifo business climate index and incoming orders have not yet shown signs of improvement. Joerg Kraemer, chief economist at Commerzbank, conveyed skepticism about a potential recovery, noting, “From the spring onwards, an anaemic upward trend is on the cards at best.”
Germany’s economy has been adversely affected by several factors, including increasing competition from abroad, high energy costs, elevated interest rates, and an overall uncertain economic outlook. These issues have contributed to sustained economic challenges, with the economy contracting for a second consecutive year in 2024.
The German government’s annual economic report painted a grim picture by revising its growth forecast for 2025 from 1.1% to a mere 0.3%. This adjustment was triggered by rising trade tensions and domestic uncertainties stemming from the impending election.
Some business organizations have gone as far as to predict another year of contraction, potentially marking three consecutive years of economic decline—a situation not seen since the country’s reunification. Carsten Brzeski, global head of macro at ING, emphasized that the present challenges are more multifaceted than those faced in the early 2000s when high unemployment and a rigid labor market were the primary issues. “The current problems are much more diverse and hence even more difficult to solve than they were 20 years ago,” he remarked.
The deteriorating economic situation played a crucial role in the collapse of Germany’s government in November, which necessitated the upcoming election on February 23. Amidst this backdrop, the economy stands as the foremost concern for voters.
Germany’s economy has stagnated for five years, with little to no growth. Andrew Kenningham, chief Europe economist at Capital Economics, observed, “The structural stagnation in Germany will drag on for some time notwithstanding the likely easing of fiscal policy after the election.”
