Economy falls back into contraction in Q4, remaining the G7’s sick man

German economy contracts again in 2024: A second reading confirmed that the German economy ended the year on a weaker footing: Seasonally and calendar-adjusted GDP shrank 0.2% on a quarterly basis, contrasting the 0.1% expansion recorded in Q3. Moreover, Germany once again claimed the title of the G7’s laggard and the Euro area’s worst-performing large economy. On an annual basis, economic activity dropped 0.4% in Q4, swinging from the previous quarter’s 0.1% increase. As a result, growth eluded the German economy for the second consecutive year in 2024; the economy contracted 0.2% overall last year (2023: -0.3%).

Q4 deterioration was broad-based: Q4’s economic woe was widespread. Net trade subtracted 1.2 percentage points from the GDP reading, deteriorating from the 1.1 percentage points detraction in the previous quarter. Exports of goods and services contracted 2.2% in Q4, deteriorating from the prior quarter’s 1.9% decline and marking the worst outturn since the outset of the Covid-19 pandemic in 2020. Meanwhile, imports of goods and services growth inched down to 0.5% in Q4 (Q3: +0.6% qoq s.a.). Domestically, weaker real wage growth, an uptick in the unemployment rate and deeper pessimism among consumers hit private spending growth in Q4, which edged down to 0.1% in quarterly terms (Q3: 0.2% qoq s.a.). In addition, public expenditure growth dropped sharply to 0.4% in the three months to December from Q3’s 1.5% rise. More positively, fixed investment rebounded 0.4% in Q4 (Q3: -0.5% qoq s.a.), likely benefiting from the ECB’s ongoing monetary policy easing cycle, rebounding capital outlays in construction, and a softer decline in those for machinery and equipment.

Economy to rebound mildly in 2025; outlook is highly uncertain: For H1 2025, our panelists have penciled in a tepid rise in seasonally adjusted GDP, with rebounding exports leading the charge. Still, dynamics on the domestic front will likely be sluggish, weighed on by January’s increase in price pressures from Q4 and political uncertainty in the lead-up to the 23 February federal elections. Sequential growth should pick up slightly in H2 2025 from H1 as the effect of the ECB’s rate cuts trickles through the real economy. Still, a protracted malaise in the key industrial sector will keep momentum below the 2015–2024 trend overall in 2025, and the economy should remain the worst performer in the G7. A U.S.-EU trade war plus rising political fragmentation denting investor sentiment are downside risks, while the new government’s fiscal policy—particularly potential reforms to the federal debt brake—will be key to watch given Germany’s lackluster public investment over recent years.

Panelist insight: ING’s Carsten Brzeski commented on the outcome of the federal election and its impact on growth: “The more positive psychological effect of the change of political leadership could be quickly offset and dampened by complicated coalition negotiations. […] It's hard to see the next government being able to deliver much more for the economy than a short-lived positive impact from some tax cuts, small reforms and a bit more investment. That is, unless the next government has really read the sign of the times.” Analysts at Goldman Sachs were more optimistic: “We maintain the view that some fiscal loosening is likely and update our deficit and growth projections. We expect the deficit to stay at 1.9% of GDP through 2025 to 2027, increasing by 0.1pp, 0.2pp and 0.4pp relative to our old forecast across the three years. We also assume that the modest reforms to labour migration and old age participation of our limited upside scenario are realised and slightly boost labour supply. We thus upgrade our growth forecast marginally in 2025 and by 0.2pp each in 2026 and 2027.”

How should you choose a forecaster if some are too optimistic while others are too pessimistic? FocusEconomics collects German GDP projections for the next ten years from a panel of 59 analysts at the leading national, regional and global forecast institutions. These projections are then validated by our in-house team of economists and data analysts and averaged to provide one Consensus Forecast you can rely on for each indicator. By averaging all forecasts, upside and downside forecasting errors tend to cancel each other out, leading to the most reliable GDP forecast available for German GDP.

Download one of our sample reports to visualize what a Consensus Forecast is and see our German GDP projections.

Want to get access to the full dataset of German GDP forecasts? Send an email to info@focus-economics.com.