Germany is facing significant economic challenges, and the Organization for Economic Co-operation and Development (OECD) has warned that it is likely to be hit hardest by a global economic slowdown due to weaker global trade and higher interest rates.
As Europe’s largest economy, Germany is grappling with complex challenges. These include difficulties in the manufacturing sector, a less-than-expected boost from China’s reopening, and elevated energy expenses, all contributing to an economic contraction in the country. This confluence of factors places Germany at a critical juncture in addressing its economic concerns.
Germany’s not facing a severe recession
Peter Oppenheimer, the Chief Global Equity Strategist and Head of Macro Research EMEA at Goldman Sachs, remarked that while Germany may not be in the midst of a severe recession, it is evident that notable global economic headwinds have more significantly impacted the country. These observations align with the recent projections from the Bundesbank, which indicated that the Germany economy is likely to contract this quarter due to sluggish private consumption and a stuttering industrial sector.
According to downbeat forecasts from the OECD for the global economy, it suggests that Germany, apart from Argentina, is expected to be the only G20 country experiencing economic contraction this year amid a broader international slowdown. Despite a robust start to 2023, buoyed by reduced energy costs and China’s relaxation of pandemic restrictions, the OECD anticipates a deceleration in activity across major economies towards the end of the year, leading to a weaker outlook for 2024.
The impact of heightened interest rates, implemented to combat soaring inflation following Russia’s incursion into Ukraine, has compounded the challenges faced by households and businesses. That, coupled with Germany’s manufacturing-reliant economy contending with reduced global trade volumes, has significantly strained the nation.
China, a pivotal trade partner for the country, has exhibited weaker growth than initially anticipated, as indicated by the OECD. Moreover, persistent inflation and elevated interest rates have strained European economic activity.
The OECD has revised its growth projections in its interim economic outlook. It now anticipates a contraction of 0.2% in Germany’s economy for this year, a stark revision from the zero-growth estimate in June. Additionally, the company received the most substantial downgrade among EU countries covered in the report for 2024, with growth now projected at 0.9%, down from the previous estimate of 1.3%.
Germany’s economy has been a rollercoaster
Germany experienced a technical recession in the year’s first quarter, with GDP growth being revised from zero to -0.3%. That has raised discussions about whether Germany is again facing the label of the “sick man of Europe,” a term first used in 1998 as the country grappled with the costly challenges of reunification.
Despite the challenging economic conditions, there are positive aspects to consider in the country’s economy. Oppenheimer noted that the equity market has been relatively resilient, and there are areas of promise, particularly in Germany’s small and mid-sized companies, often referred to as the Mittelstand. These companies play a crucial role in the economy and have demonstrated resilience in various economic circumstances.
Meanwhile, global interest rate changes have had an impact on the country’s economy. The European Central Bank recently raised rates to their highest level since the euro’s inception in 1999. On the other hand, the US Fed will keep borrowing costs steady. At the same time, the Bank of England will likely implement its final interest rate increase in the current cycle, following 14 previous hikes.
