Economic Challenges Persist
Germany, Europe’s largest economy, experienced its second consecutive year of economic contraction in 2024, according to official data released Wednesday by the Federal Statistical Office. Gross domestic product (GDP) declined by 0.2%, following a 0.3% contraction in 2023, marking the first back-to-back economic shrinkage since the early 2000s.
The prolonged downturn highlights significant challenges for Germany and the broader European economy as the region seeks to revitalize growth. Carsten Brzeski, global head of macroeconomics at ING, noted that these back-to-back contractions underscore long-term structural issues in the German economy.
Upcoming Election Amid Economic Uncertainty
The GDP data arrives just weeks before a critical snap election triggered by the collapse of Germany’s governing coalition over economic reform disagreements.
“Hope is that any new German government would decide on a longer-term plan for economic reforms and investments,” Brzeski wrote in a report.
Volkswagen’s Struggles Reflect Broader Economic Issues
Germany’s economic troubles are exemplified by challenges at Volkswagen, the nation’s largest manufacturer. In December, the automaker announced:
- 35,000 job cuts in Germany.
- Plans to shift production to Mexico.
These changes reflect Germany’s broader struggles with high labor costs, weak productivity growth, and competition from China. Additionally, declining demand for German exports in China has impacted growth, as more goods are now produced locally in the world’s second-largest economy.
Impact of Global Factors
Germany’s industrial production remains 10% below pre-pandemic levels. The potential for higher tariffs from the incoming U.S. administration under President-elect Donald Trump could further weaken German exports and drive companies to relocate production to the U.S., exacerbating the economic situation.
Bleak Outlook for 2025
Germany’s central bank projects continued economic stagnation, with GDP recovery expected to begin slowly in 2025. Meanwhile, the broader European economy remains subdued, with industrial production in the eurozone still 9% below levels seen seven years ago.
Adrian Prettejohn, an economist at Capital Economics, cautioned that structural issues in Germany’s auto sector and high energy prices driven by geopolitical tensions in Ukraine would weigh on the eurozone’s industrial output for the foreseeable future.
Structural Reform Needed
The latest data underscores the urgency for Germany to adopt long-term structural reforms and investments to address systemic economic challenges, boost productivity, and navigate shifting global trade dynamics.
