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Germany's recession fears: Economic outlook is grim

February 22, 2024

The German government's annual economic report is bleak. Any hopes that things might pick up again in 2024 have vanished into thin air.

German Economy Minister Robert Habeck holding a chart at a press conference
German Economy Minister Robert Habeck has warned that Germany is facing bleak timesImage: Carsten Koall/dpa/picture alliance

Economy Minister Robert Habeck presented poor economic figures to parliament this Thursday. He conveyed a sense of urgency while trying not to paint too bleak a picture of the overall situation.

Inflation has fallen — it averaged 5.9% last year and is expected to fall to 2.8%, according to the German government's annual economic report. 

"We have reached a point where there is more money in our wallets again," Habeck told the Bundestag, expressing hope that consumption could then boost the economy.

The German economy is not doing well — this is nothing new. "Compared to most other major industrialized countries, our country is falling further behind. We do not see any chance of a rapid recovery in 2024," said the President of the Federation of German Industries, Siegfried Russwurm, back in January.
Many were not expecting the German government to lower its projected growth for 2024 so significantly — from 1.3% to 0.2%. It came as "quite a surprise," said Almut Balleer from the RWI Institute for Economic Research in Essen during a discussion at the Leibniz Association.

Germany cuts growth forecasts for 2024

Good news from the labor market

The uncertainty is too great, warns Balleer, who blames policymakers in particular. "Many were hoping that things would pick up once an agenda was announced on how the energy transition and other future challenges would be tackled."

But there have been some positive developments as well. Inflation has become manageable," according to Finance Minister Christian Lindner.  Wages and salaries have risen, so people are in a position to spend money and drive consumption. And yet people are not spending as much as expected, opting instead to save.

In addition to the manageable inflation, it is the stable labor market that offers a ray of hope: 46 million people are employed in Germany and that figure is set to rise this year.

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The parties in the center-left government of Social Democrats (SPD), Green Party and neoliberal Free Democrats (FDP) have so far failed to agree on a clear course of action. Disputes continue to surface, especially between Economy Minister Habeck of the Greens and Finance Minister Lindner who heads the FDP.
The two do agree that the ability of Germany to compete as a place for business is at risk. At the release of the annual economic report in Berlin this week, Habeck spoke of an "extremely challenging situation." However, while Lindner is insisting on lower taxes for companies, Habeck is calling for a debt-financed special fund for more investment, which Lindner rejects.

Demographic change

Germany is suffering from structural problems that have built up over many years. According to Habeck, the shortage of skilled workers and laborers is the number one problem, which is set to get worse in the coming years, dampening growth. "We need all of our knowledge and skills, all of our hands and heads, all of our talents and abilities," he says.

What is needed is more education, better opportunities for women, and better incentives for older people to voluntarily work longer, but also more immigration of skilled workers and better integration of refugees into the labor market. It is also about the question of "who we are, as Germany, and I can tell you that if we fail to treat all these people as partners, friends, and Germans, then the economy will collapse".

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The reform project involves greatly expanding renewable energies, and subsidies to help industrial sectors become climate-neutral. Reducing unnecessary bureaucracy and, where additional bureaucracy is necessary, ensuring that it is proportionate. Expanding trade relations with other countries, building more affordable housing and modernizing transport infrastructure. Investments of around €70 billion ($76 billion) are planned for 2024. On top of this, another €49 billion ($53 billion) will come from the climate fund.

Companies are not the only ones who will be closely watching to see whether the government can make good on its promises. The SPD, Greens, and FDP are a long way from their goal of building 400,000 new homes a year. The reduction in bureaucracy, which was announced when the government assumed power, is not making any progress either.

"We have a lot of superfluous laws which, if we were to abolish them, nothing would be lost," Clemens Fuest from the ifo Institute for Economic Research in Munich told public broadcaster ARD. According to Fuest, previous governments are also to blame for this. "Yet we are seeing burdens increasing dramatically, with an explosion of planned economy and interventionism that is weighing on the economy."

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Affordable energy

Economy Minister Habeck sees a ray of hope in energy prices. Gas, and as a result electricity, are significantly cheaper. "Energy prices are not yet where we want them to be, but they have fallen faster and more significantly than we expected just a few months ago."

But is this enough to compete internationally? Marcel Fratzscher, President of the German Institute for Economic Research (DIW), is doubtful: "In the short term, there will be no change to the significantly higher energy costs in Germany compared to other economies that were not quite as dependent on Russian gas and oil," said Fratzscher in the Leibniz Association panel discussion.

Fratzscher believes that financially supporting energy-intensive companies is the wrong approach.

"Transformation cannot mean cementing existing structures but must allow for change. It's not so bad if some energy-intensive companies relocate production and jobs abroad."

On the other hand, he believes that the industries of the future should be promoted. "At the moment, what I see missing is a strategic orientation involving a plan, priorities, and, above all, the coordination of European policy."

This article was originally written in German.

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