Germany is in recession, facing a three-quarters-long GDP contraction followed by stagnation, driven largely by structural factors rather than just cyclical issues. Key challenges include:
- Structural Headwinds: Manufacturing competition from China, global shifts towards electric vehicles, and a shrinking, aging workforce.
- Economic Contraction: Germany’s Q2 2024 GDP fell by 0.4 percentage points, with weak domestic demand, rising unemployment, and declining industrial output continuing into Q3.
- Consumer Weakness: Consumer surveys show little improvement since the European gas crisis. Real wage growth is slowing, and households have less available cash than before the pandemic.
- Labour Market Struggles: Unemployment has risen from 2.9% in May 2023 to 3.4% in July 2024, with over 230,000 workers on government-subsidized short-time work schemes.
- Fiscal Constraints: Despite some fiscal space, Germany’s strict self-imposed rules and fragile coalition government limit stimulus and structural reform prospects.
- Outlook: GDP growth forecast is -0.2% for 2024 and 0.1% for 2025, lower than consensus. Industrial decline and consumer weakness suggest a prolonged downturn with stagnation afterward.
Euro Area Impact:
- Germany’s recession will drag down euro area GDP growth, but the southern periphery (especially tourism-reliant economies) is expected to outperform.
- Inflation is expected to fall below 2% earlier than ECB projections, increasing market expectations for ECB rate cuts.
- The ECB is likely to cut rates gradually, with risks of faster or deeper cuts as recession concerns rise.
