Germany’s economy shrank more than expected due to weak industry

The German economy has shrunk again, with its gross domestic product (GDP) contracting more than anticipated. The primary reason for this downturn was weak industrial production.

The Federal Statistical Office announced today (August 22) that gross domestic product fell by 0.3% in the April-to-June period compared to the previous quarter.

Initial estimates had projected a decline of only 0.1%.

The revision was explained by the fact that “industrial production, in particular, developed worse than initially estimated.”

In the first three months of the year, growth had reached 0.3%.

Meanwhile, the German government’s financial situation has improved: according to preliminary data from the Federal Statistical Office, the treasury spent 28.9 billion euros more than it received in revenue during the first six months of this year.

However, the government deficit saw a significant year-over-year reduction of 19.4 billion euros, as social security contributions and tax revenues grew faster than government spending.

Relative to total economic output, the combined deficit of the federal government, states, municipalities, and social security funds was 1.3% in the first half of 2024.

The Bundesbank does not expect growth in this summer quarter either. According to its latest monthly report, Europe’s largest economy will stagnate.

“The bleak outlook for global trade, the still weak order situation, and low capacity utilization will continue to negatively affect corporate investment,” the report stated. No strong momentum is expected from the construction sector for the economy.

As reported by Handelsblatt, IMK Institute director Sebastian Dullien is more optimistic. Dullien said, “Early indicators such as company surveys, construction permits, and incoming orders suggest that economic growth will accelerate in the second half of the year. Announced public investments and improved depreciation conditions should stimulate private investment, and rising wages along with lower inflation are expected to lead to a recovery in private consumption.”

In addition, weak expectations in the labor market and a slowdown in wage growth have negatively impacted private consumption. Service providers also remained generally stagnant.

On the other hand, according to a survey of companies by financial services provider S&P Global, the private sector purchasing managers’ index, which includes industry and services, unexpectedly rose by 0.3 points to 50.9 points in August. This is the best figure since March.

Thus, the barometer remained above the 50-point mark, which indicates growth, for the third consecutive month.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCOB), commented on this development: “We are only talking about moderate growth here, but we see this development as a sign of resilience. After all, there is no shortage of adverse conditions, such as US tariffs, geopolitical uncertainty, and relatively high long-term interest rates.”

According to the Federal Statistical Office’s revised calculations, German economic output contracted even more significantly in 2023 and 2024 than initially reported. The statistics show a 0.9% decline for 2023 (previously: 0.3%), while gross domestic product decreased by 0.5% (0.2%) in 2024.

According to the latest calculations from the Federal Statistical Office, the government deficit rose to 115.6 billion euros last year. Relative to total economic output, the deficit was 2.7% according to the latest figures, compared to 2.5% in 2023.

The European Stability and Growth Pact allows EU countries a budget deficit not exceeding 3% and total borrowing not exceeding 60% of nominal gross domestic product. In Germany, gross debt reached 62.5% of GDP in 2024.

In June, production in the manufacturing sector (industry, construction, and energy production) fell by 1.9%.

The production index fell to its lowest level since May 2020, shortly after the outbreak of the pandemic and the subsequent lockdown measures.

Furthermore, existing orders do not offer hope that this weak period will end soon.

According to the Bundesbank, more than three-quarters of the loss in market share is due to a significant deterioration in the competitiveness of German exporters.

A few days ago, the Ifo Institute also confirmed this view: a quarter of German industrial companies report that their competitiveness against companies in non-EU countries has decreased.

Compared to their competitors within the EU, one in eight companies believes its competitiveness has diminished.

The Ifo Institute states that German industry is grappling with structural disadvantages. The result: many companies are losing market share.