Q3 data shows German economy shrinked

In the third quarter, the German economy contracted, raising concerns about a potential recession in Europe’s largest economy. Gross domestic product (GDP) declined by 0.1% compared to the previous quarter, which was slightly less than the 0.2% decrease that economists had anticipated. The statistics office attributed this decline to a decrease in household spending.

This economic data underscores the challenges Germany has faced in recovering from an energy-induced downturn experienced during the previous winter, which was followed by two quarters of stagnation or minimal growth, as per revised data. Germany is the only major economy projected by the International Monetary Fund (IMF) to contract in the current year, and there are growing questions about its longer-term economic prospects.

The impact of higher interest rates, both domestically and globally, is having a significant effect on the demand for industrial goods, which Germany relies on more heavily than many of its peers for economic growth. Some large German companies, such as chemical giant Lanxess AG, have announced workforce reductions, while Volkswagen AG is increasing its cost-saving efforts to enhance profitability.

While the services sector had been holding up relatively well, business surveys conducted by S&P Global indicate a slowing momentum in that sector as well. Additionally, there are signs of stress in the labor market, which had been a positive aspect of the German economy.

As the fourth quarter began, private-sector activity in Germany continued to contract, according to S&P Global. The hope for a rebound is partially based on cooling inflation and rising wages, which are expected to drive consumer spending. However, a recent Bundesbank report suggests that households have not yet increased their spending. Analysts polled by Bloomberg anticipate that Germany will achieve 0.5% growth in 2024.

Other GDP data from the European region have been mixed. While Spain maintained growth, Austria fell into a recession due to declines in consumption and investment. Figures for the 20-nation eurozone were due the following day, with analysts estimating that growth had stalled between July and September.

Germany’s recent economic performance has raised concerns about its future potential, particularly as it faces challenges such as an aging workforce, an over-reliance on China for trade, and the need for a rapid transition to new energy sources. Top officials, including Bundesbank President Joachim Nagel, have cautioned against excessive pessimism, emphasising the country’s capacity to adapt. However, they also acknowledge the need for proactive measures to safeguard Germany’s position as a favourable business destination, as highlighted by Economy Minister Robert Habeck’s recent call for decisive action.