Germany's economy is in for a rough ride in 2024

11, Apr - REVIEWS

Perhaps in 2024 the German economy will grow slightly, but so far everything points to the fact that the year will not be very good. Dynamic developments seem out of reach.

A train of new cars from a factory in Germany

Until official figures are released, it will take time to know the exact numbers, but it is likely that the German economy shrank last year. Economists and industry associations have rarely been so unanimous in their assessments as in the case of 2023, which they call a year of stagnation.

Indicators for the start of 2024 do not look encouraging either

As Moritz Kremer, chief economist at Landesbank Baden-Württemberg, noted in a recent TV interview about the quarterly figures: "I don't want to argue about whether there will be a 0.2% increase or a 0.2% decrease. The fact is that we are in a state of stagnation."

Kremer compared the current slow growth of the German economy to waves of corrugated metal sheeting. "We are in a kind of 'corrugated economy'. It rises and falls a little bit, but essentially we are lying flat on the ground."

How did Germany get to this state?

The reasons why Germany is suffering are well known. Consumers are holding down prices due to inflation. In addition, the sluggish global economy is putting a strain on exporters, who used to be the driving force behind the economy.

In addition, because of volatile energy prices, many multinational corporations are putting their investment plans on hold. Or worse, they are building new production facilities abroad - in the United States or China, far from the European Union.

Finally, the ambitious "green" transformation of Europe's largest economy under the leadership of Economy and Climate Minister Robert Habeck is costing a tidy sum.

Germany's climate and industrial projects are in danger of being derailed after a court made a major decision to cut funding from the federal budget.

A balanced budget and a big hole

In mid-November last year, when it looked like things couldn't get any worse, the Constitutional Court rejected the government's proposal to reallocate 60 billion euros ($65 billion) of COVID-19 funds to climate protection and economic modernization.

The government's plans depended heavily on the use of these funds in the coming years, and the court's decision created huge financial problems.

One might have thought that parliament would simply approve new loans - this time not to fight COVID, but to finance the energy transition and other purposes.

However, Germany's "debt brake" prevents this from happening. A fiscal rule introduced in the constitution in 2009 obliges the government to keep the budget balanced and strictly limits new borrowing. An additional €60 billion in debt could only be approved by declaring the pandemic an emergency, which in turn would temporarily suspend the "debt brake."

Less spending, less growth

The ruling threw the government's budget calculations out the window and caused serious uncertainty among businesses and consumers. And it has forced the government to look for austerity options.

In late November, after intense negotiations, the government agreed a supplementary budget for 2023 and suspended the debt brake for that year.

The 2024 budget has been cut significantly. Some fear that the planned spending cuts, reduced subsidies and higher energy prices could further slow the economy and even accelerate inflation.

Degradation: A slowdown for the environment?

Habek's projects in the areas of climate and industrial policy were also jeopardized because of the ruling. The ministry estimates that this could reduce economic growth by half a percent.

As ING chief economist Carsten Brzeski notes, the court ruling has revealed two new risk factors for the German economy: fiscal austerity and political uncertainty.

"The situation in Germany is very tense right now," emphasizes Thomas Gitzel, chief economist at VP Bank. "The government must act quickly. However, the Constitutional Court's ruling could force the government to take austerity measures, which would lead to an additional slowdown in growth."

Looking at the numbers from different angles

Even before the court ruling, the European Commission considered Germany to be the eurozone's growth leader next year: growth was expected to be 0.8%.

The German government's current economic forecast still assumes a 1.3% increase in gross domestic product (GDP) in 2024.

However, almost all of the most respected economic researchers expect German GDP growth to be less than 1% in 2024.

The Organization for Economic Cooperation and Development (OECD) predicts an increase of 0.6%. By comparison, the average growth of all 38 OECD member countries is estimated at 1.4%.

The crisis is seemingly in all directions

"The energy crisis hit Germany harder than other countries because industry plays a more important role in this country and dependence on Russian gas was much higher than in other countries," stressed OECD economist Isabell Koske, summarizing the reasons for the economic weakness.

High inflation has reduced the purchasing power of households and therefore affected consumption. "The government budget crisis is also causing concern among companies and consumers," she added.

"It is crucial to resolve the budget crisis as soon as possible to provide companies and households with security and confidence in the future," Koske emphasized. "The solution must include spending cuts, revenue increases and fiscal policy reform."

No growth in the end?

Deutsche Bank experts express an even more pessimistic attitude. According to Stefan Schneider of DB Research, the German economy could shrink in 2024.

At a Bundesbank reception in Berlin in mid-October, Moritz Schularick, president of the Kiel Institute for the World Economy, outlined the key stress factors for the German economy. He noted that Germany has made three important bets over the past decades that are now becoming a source of trouble for the country.

"The first bet is Russian gas as a cheap source of energy for industry. The second is the Chinese economic miracle as a driving force for German exports. And finally, the bet on Pax Americana, on outsourcing national security to America," he explained. "On all three of these points, the country is coming to the end of its road."