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German economy set to shrink in 2023, experts say

September 28, 2023

A new report predicts a dip in economic output this year, correcting earlier forecasts of moderate growth. But experts are optimistic for 2024.

Frankfurt skyline with dark storm clouds
Soaring energy prices, high interest rates and inflation have spelled trouble for Europe's largest economyImage: Florian Gaul/greatif/picture alliance

Germany's economy is set to hit a slump in 2023, according to a report released by several leading economic research institutes on Thursday. 

The Joint Economic Forecast, commissioned by the government and published twice a year, expects a downswing in Germany's gross domestic product (GDP) of 0.6% this year.

In their spring report, experts had predicted moderate economic growth of 0.3%, but official numbers showed stagnation in the second quarter of 2023.

Why is Germany's economy shrinking?

Economists say skyrocketing energy prices in 2022 — linked to Russia's war in Ukraine — put a halt to post-pandemic economic recovery. This drove up inflation, meaning people could buy less with their money, and dampened industrial production.

"Industry and private consumption are recovering more slowly than we had expected in spring," said Oliver Holtemöller, vice president of the Halle Institute for Economic Research (IWH).

He added that businesses were also concerned by what they saw as political insecurity.

Germans pessimistic about country's economic slump

Germany below EU average

The new report confirms the International Monetary Fund's forecast from earlier this year that Europe's largest economy is set to shrink in 2023.

Recent figures from other major European economies like the UK and Italy show that they might face economic contraction as well. However, Germany's neighbor France is on track to rebound to a growth rate of 1% in 2023, according to European Commission figures.

Across the European Union as a whole, the Commission currently predicts 0.8% growth, putting Germany well below the bloc's average.

Economists hopeful for 2024

But economists are optimistic that the country's economy will bounce back in 2024, as inflation is already letting up.

Wages have gone up, while "energy prices have decreased and exporters have passed on some of the increased costs," the Joint Economic Forecast says.

It predicts a moderate growth of 1.3% for next year, but warns that the "potential for growth will shrink significantly in the medium term" as Germany's working population will decline. 

fg/ab (AFP, dpa)

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