Germany set for economic contraction

Energy crisis, global pressures conspire to make outlook for year more gloomy

Germany's government has predicted the nation's economy will contract by 0.4 percent this year, due to persistent inflation, increasing energy prices, and weakened international trade.

The government had predicted in April that the economy would grow by 0.4 percent, but weakness in the industrial sector and high interest rates have introduced concern about recession in the eurozone's largest economy.

The Economic Ministry has now joined numerous other forecasters in significantly reducing its growth projections.

Both the International Monetary Fund and a consortium of top German economic think tanks recently predicted a downturn in the German economy, with projected contractions of 0.5 percent and 0.6 percent, respectively.

In a statement, the ministry said: "The effects of the energy price crisis in combination with global economic weakness are weighing down the German economy more persistently than was assumed in the spring."

The ministry predicted an economic upturn will start by the year's end, driven by revived consumer demand.

It acknowledged that the European Central Bank's inflation measures, which have led to increased borrowing costs, have contributed to Germany's struggles.

After facing a technical recession in the final quarter of last year and the first quarter of this year, Germany's economy is predicted to bounce back with growth of 1.3 percent and 1.5 percent in 2024 and 2025.

The government's forecast also indicates a gradual descent in inflation, from 6.1 percent this year to 2 percent in 2025.

The country is also confronting challenges, including an aging population, the underutilization of digital technology in business and governance, the hindrance of business and construction due to excessive bureaucracy, and a scarcity of skilled workers, reported the Associated Press news agency.

Analysts cited by The Times newspaper warned that, amid various challenges straining the German economy, the nation will need to diversify its export-reliant economic model.

The inflation rate in Germany, measured as the year-on-year change in the consumer price index, or CPI, stood at 4.5 percent last month. In both August and July, the inflation rate stood at 6.1 percent and 6.2 percent, respectively.

According to Germany's official statistics office, Destatis, the country experienced exports decline by 1.2 percent in August and 1.9 percent in July, which was more than initially expected. There was a 0.2 percent drop in industrial production, and retail sales fell 1.2 percent.

Since the COVID-19 pandemic, Germany, with 0.2 percent economic growth, has been the weakest performer in the G7 group of nations, trailing behind the United Kingdom, which has expanded by 1.8 percent. The UK's economy is projected to expand 0.5 percent this year.