0.3% Contraction in German GDP Amid High Inflation and Energy Prices

Summary

  • The German economy contracted by 0.3% in the fourth quarter in comparison to its preceding quarter according to statisticians.
  • Weak foreign demand, high energy prices, and constant inflation caused a 0.3% contraction in Germany’s economic growth in the past year.
  • The Ifo institute is forecasting a 0.2% fall in Germany’s GDP for Q1 2024, projecting short-lived growth.
  • The increase in negative data puts a lot of strain on Chancellor Olaf Scholz’s administration as they navigate towards a green economy while safeguarding industrial sectors from increased production costs and international competition.
  • The slowing down of inflation could provide a glimmer of hope, with the expectation that the consumer price index will gravitate back to the European Central Bank’s 2% target by mid-2024.

Economic Fallout

A dip of 0.3% was observed in the gross domestic product in Q4 in comparison to the third quarter, a fact pointed out by the statistics office. Last year, the German economy saw a decrease of 0.3% as a result of high costs of energy, constant inflation, and stifled foreign demand.

Interestingly, because of the GDP’s stability during the second and third quarters, the biggest economy in the eurozone managed to steer clear of another technical recession. Usually, two consecutive quarters of contraction qualifies as a technical recession.

Short-Lived Growth

Predictions made on Tuesday by the Ifo institute hint towards a 0.3% decrease in the GDP for the Q1 of 2024. As per economist Joerg Kraemer from Commerzbank (ETR:), private consumption has been below expectations. He highlighted, “The recent fall in industrial production and the low level of the Ifo business climate indicate that the German economy also contracted in the first quarter.”

Economic output in Germany has not improved in four years, a fact noted by Alexander Krueger, an economist at Hauck Aufhaeuser Lampe. He commented on how a stagnant growth rate is increasingly common in Germany.

Facing Major Challenges

A surge of negative data has put pressures on Chancellor Olaf Scholz’s administration with the task of facilitating an expensive transition towards a greener economy. Meanwhile, they also aim to protect the industry from increased production costs and foreign competition.

Top officials from the BDI industry association, BDA employers’ association, DIHK Chambers of Commerce, and the ZDH association for skilled trades have written, “The German economy is facing major structural challenges. We urgently appeal to the federal government to take immediate action to stimulate an economic recovery in our country.”

Inflation Eases

Despite anticipations of economic stagnation in the following quarters, Thomas Gitzel from VP Bank is optimistic due to the possible easing of inflation. The consumer price index is expected to lean towards the European Central Bank’s 2% target during mid-2024. “This will then give European monetary authorities room for manoeuvre to cut interest rates. This will benefit companies and consumers, but above all the struggling construction industry,” Gitzel said.

In terms of potential impact on forex trading, this economic contraction in Germany could affect the Euro’s strength and performance against other currencies. It may also influence investment patterns within foreign exchange markets.

PIP Penguin
Logo