Germany is the third largest economy in the world after the US and China, making it the largest economy in Europe. It is also the third largest exporter in the world and the services sector accounts for 70% of the country's gross domestic product (GDP).
Projected weak economic growth in 2024
Germany's economy is projected to grow sluggishly in 2024, mainly due to continued uncertainty. Consumers are prioritizing savings and businesses are cautious in their investment activities. Also, funds earmarked for the coronavirus crisis will not be allocated to the climate fund, leading to a budget deficit of €17 billion in 2024 and requiring austerity measures. Weak external demand, especially from China, further exacerbates the economic outlook. However, if economic and geopolitical risks gradually subside and inflation rates continue to fall, economic growth could pick up.
German exports decline in December
In December 2023, Germany's merchandise exports fell significantly by 4.6% year-on-year to €125.3 billion in November 2023, the largest decline of the year. At the same time, imports also fell by 6.7% to €103.1 billion in December, the largest decline of the year.
This unexpected downturn at the end of the year led to a 1.4% drop in German exports for the full year compared to 2022 to €1,562.1 billion. Imports fell even more sharply, down 9.7% to €1,352.5 billion, nearly doubling the export surplus to nearly €210 billion.
Global economic conditions remain insufficient to stimulate Germany's export-oriented economy. Consequently, the export sector faces another challenging year in 2024, exacerbated by trade risks arising from tensions in the Red Sea. Business expectations of companies are in line with this trend, as evidenced by the downward revision index published by the IFO Institute for January 2024.
Lower inflation at the beginning of the year
After rising at the end of 2023, German inflation fell at the start of the new year. Consumer prices in January 2024 were 2.9% higher than in the corresponding month of the previous year, the lowest level since June 2021. The decline in inflation is attributed to cheaper energy, with prices falling by 2.8% year-on-year.
Economists expect the inflation rate to fall further over the course of the year, albeit with fluctuations. According to the IFO-Institute, more companies related to the consumer sector are planning to raise prices in the coming months. The economic research institutes' forecasts for Germany's inflation rate in 2024 range between +2.1% and +3.5%.
Rising number of unemployed
In January 2024, Germany saw a seasonal increase in the unemployment rate, which reached 2.8 million people. This is 169,000 more than in December 2023 and 189,000 more than in January of the previous year. Thus, the unemployment rate rose from 0.4% to 6.1%.
Despite continued economic weakness, employment and labor demand remain stable, providing a resilient labor market at the start of the year. However, the apprenticeship market continues to face challenges, with many apprenticeship programs offered by companies remaining unfilled.
Stagnation of the gender pay gap in Germany
Gender pay inequality persists in Germany, with women earning significantly less than men. The gender pay gap remains unchanged and covers both total pay and pay for comparable roles and qualifications. On average, women earned 18% less than men per hour in 2023: €20.84 per hour compared to €25.30 for men. Even in comparable roles, the gap was six percent.
The gender pay gap is due to various factors, including women's higher representation in lower-paid sectors and difficulties in moving into higher-paid positions. Despite similar qualifications and career progression, women still earn less than men, with a difference of 6% in direct comparison.
Germany's future economic position will depend on the government's ability to mitigate the impact of geopolitical and economic challenges. Innovation, digitalization and sustainability could be key drivers of economic growth in the coming years.