Germany is facing a two-year recession for the first time since the early 2000s, prompting the government to slash its 2024 growth forecast for the Eurozone’s largest economy.
If Economy Minister Robert Habeck’s forecast for this year is correct, Germany will experience a two-year recession for the first time in more than 20 years, after output shrank by 0.3 percent in 2023. In 2002, the economy contracted by 0.2 percent, followed by a 0.5 percent decline in 2003.
“The economic conditions are currently unsatisfactory,” Habeck said on Wednesday. “But we are in the process of finding a way out of this situation,” he added.
The minister argued that Germany has made “real progress” in recent years in addressing the “short-term” factors—rising inflation, high interest rates, and surging energy costs due to the war in Ukraine and subsequent anti-Russian sanctions—that have depressed output.
However, Habeck pointed out that longer-term structural issues, such as “Germany’s serious skills shortage,” years of underinvestment in infrastructure, and excessive bureaucracy, continue to hold back growth.
Habeck, who also serves as vice-chancellor, predicted that GDP would shrink by 0.2 percent this year, a sharp downgrade from an earlier forecast of 0.3 percent growth.
With energy prices falling, ministers and economists had initially hoped the economy would see a temporary recovery this year. But a steady stream of pessimistic data in recent months has clouded the outlook. “The recovery has been postponed once again,” Habeck said.
Citing high labor and energy costs, a heavy tax burden, and political uncertainty, some companies are considering moving production to cheaper countries, raising fears of deindustrialization in Europe’s largest economy.
Despite these concerns, Habeck expressed cautious optimism that the economy would begin to recover next year, as lower inflation and easing interest rates, combined with rising real wages, are expected to boost consumer spending.
The minister suggested that “in the last three to four quarters, people have started to feel wealthier again.”
Habeck’s ministry expects the economy to grow by 1.1 percent in 2024 and 1.6 percent in 2026, driven by stronger private consumption, increased investment, and rising international demand for industrial goods.
However, Habeck emphasized that Germany’s economic challenges run much deeper, noting that the two pillars of the country’s success—cheap Russian gas and well-functioning global markets, both critical for a leading exporter like Germany—no longer exist.
According to Habeck, the first pillar has been undermined by the war in Ukraine, while the second has been destabilized by China’s “aggressive export strategy” and rising U.S. protectionism.
“Half of Germany’s growth has always come from exports, and this pillar is now under threat. We have essentially not grown at all since 2018,” Habeck said.
Despite his cautious optimism about short-term improvements, the Green minister suggested that Germany’s long-term growth potential remains low.
“Even if we did everything right—reduced bureaucracy, had the necessary skilled workers, and secured the needed capital—we would only be looking at a growth potential of about 0.6 percent,” Habeck said.
He attributed this to “the failures of past decades, not just the past few years,” pointing out that successive governments had not invested enough in infrastructure, digitalization, and the mobilization of skilled labor.
