(Bloomberg) — Germany is about to report a second straight year of economic contraction, reminding politicians before February’s snap election of the daunting task they face.
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Analysts estimate gross domestic product grew 0.1% in the fourth quarter — insufficient to produce a positive result for the whole of 2024. A drop of 0.2% in output is anticipated, contrasting starkly with the 0.8% advance seen for the 20-nation euro zone.
Wednesday’s release from Germany’s statistics office marks the first set of full-year numbers from a Group of Seven nation. But even if it yields a positive surprise, recent data leave little doubt that a genuine turnaround — especially in the reeling manufacturing sector — is some way off.
How the next government deals with Germany’s stringent fiscal rules will be crucial in determining whether it can reinvigorate growth.
“We’re expecting fourth-quarter growth to be flat because of this anemic sideways movement we’ve been observing in various indicators,” said Vincent Stamer, an economist at Commerzbank. “We also see a weak start in 2025, before we eventually get a gradual pickup in investment thanks to lower interest rates.”
Data last week painted a similarly mixed picture. Even some positive figures — industrial production saw an uptick in November — are unlikely to have supported economic expansion at year-end, Bloomberg Economics said.
Help is coming from the European Central Bank, which cut borrowing costs four times last year and plans more in 2025. That could spur investments across the region and benefit German manufacturers. Rising household incomes, meanwhile, should perk up spending.
What Bloomberg Economics Says…
“We expect the industry weakness to continue to weigh on overall economic activity and see GDP growth in 2025 to be very modest, following two years of contraction. Further troubles of the manufacturing sector, such as a potential notable lift of US tariffs on European exports, could easily push Germany back into recession territory.”
—Martin Ademmer, economist. Click here for full note
Despite such hopes, however, there’s a growing realization that much of Germany’s malaise is down to problems that have built up over years — including worsening demographics, a lack of modern infrastructure and declining competitiveness.
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The situation has occupied much of the public debate ahead of the Feb. 23 election. Chancellor Olaf Scholz, whose fragile three-party coalition had to manage the fallout from the Covid-19 pandemic and Russia’s invasion of Ukraine, looks set to be defeated by Friedrich Merz, who leads the conservative CDU/CSU bloc.
While parties suggest an array of measures to fix the economy, a particular focus has been the state-borrowing limit enshrined in the constitution, known as the debt brake.
Scholz’s Social Democrats and the Greens — either of which could form a government with the conservatives, according to polls — advocate overhauling the rules to allow more investment.
Both call for 10% grants on investments, purchase premiums for electric vehicles to revive the country’s struggling automotive sector and a fund of at least €100 billion ($103 billion) for public investment. They also want lower power prices and grid fees.
The crucial question is whether the conservatives, who hold a significant poll lead, are willing to reform the debt brake. Their manifesto states they’ll adhere to the debt limit, focusing instead on wide-ranging tax cuts to revive Germany’s fortunes.
Merz, though, has signaled openness to adjustments allowing for more investment. Silvia Ardagna, an economist at Barclays in London, said she ultimately expects the election to eliminate the kind of fiscal consolidation that Scholz’s coalition targeted.
“It’s more avoiding additional tightening, rather than putting in place very large stimulus,” she said. “It will definitely help, but the time horizon is also important. Any investment project will probably take at least a year before it has an impact on growth.”
Years of budgetary discipline do give the next government space to invest more. Bond markets assume Germany’s financing costs wouldn’t rise significantly if it were to spend about €220 billion ($227 billion) more — equivalent to 5% of GDP. This indicates markets have also priced in a broad political consensus to ramp up public investment.
LBBW economist Moritz Kraemer expects the new administration to eventually move in that direction, even if he deems the blueprints offered so far “simplistic.” But he cautions that firms have their own homework to do — by spending more on digital technologies that are crucial in the 21st century.
“We’re still making the same products as in 1990 and 2000, and that’s unrelated to which coalition governs in Berlin,” he said. “Things will continue as they are until we achieve a turnaround. There’s a desperate desire to cling to the business model of the past.”
–With assistance from Kristian Siedenburg, Joel Rinneby and Harumi Ichikura.
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