One economy’s loss is another one’s gain? Not quite.
When Japan unexpectedly entered a technical recession last month, industrial behemoth Germany became the world’s third largest economy. Japanese GDP contracted by 0.4% in the last quarter of 2023, compared to 2022, triggering a reordering of the leading economices.
But Germany is facing its own set of problems, many of them structural.
Dogged by inflation and high energy costs, it narrowly avoided recession at the end of 2023 as its economy shrank 0.3%. Growth is forecast to remain weak this year at best; the government has revised down its forecast GDP growth from 1.3% to just 0.2% and Capital Economics of London predicts the economy will not grow at all in 2024.
As the eurozone’s largest economy, Germany is widely considered the bloc’s barometer. High interest rates and weak demand are bearing down on the EU, impacting business sentiment. Expectations that the European Central Bank might cut record-high interest rates were scuppered last month after the bank said it was too early to do so.
Policymakers’ fixation on reining in eurozone inflation and refusal to cut rates might be enough to tip Germany into a full-blown recession. Supply-chain disruption could intensify in the short-term, too, amid continuing attacks on Red Sea maritime traffic by the Houthis, creating more uncertainty for Germany’s export-led economy.
Unsurprisingly, bearish sentiment is on the increase.
Last month, Robert Habeck, vice chancellor and minister for Economic Affairs and Climate Action, went so far as to describe the situation as “dramatically bad.” In a recent note, ING noted numerous concerns. “To make things worse,” the Dutch bank said, “the new year brought new problems for the German economy: strikes by train drivers and supply chain disruptions as a result of the military conflict in the Red Sea have made another contraction in the German economy in the first quarter of the year even more likely.”
