Germany expected to be the only major European economy that would contract

Bracing for a prolonged recession this year, Germany is the only major European economy to see an economic contraction during 2023, according to new forecasts by the European Commission, the EU’s executive arm.

Europe’s largest economy is expected to record a 0.4% decline in economic activity this year – 0.6 percentage points lower than the estimate made in May, according to the Commission, which published new forecasts on Monday. The institution also lowered its growth forecast for Germany in 2024 from 1.4% to 1.1%.

The German economy has faced difficulties in the wake of the Russian invasion of Ukraine, with Berlin having to very quickly end years of dependence on the Kremlin for energy. The International Monetary Fund said in July that Germany would likely contract by 0.3% this year.

Leading economists have called the traditional economic powerhouse the “sick man of Europe.” This concept was formulated in 1998 when Germany faced profound economic challenges. But now the issue is resurfacing, with Berlin recording deep declines in production.

Data released in early September manufacturing activity in The country’s growth rates declined at the strongest pace since June 2009, excluding the period of the Covid-19 pandemic.

However, other economists disagree that the problems Germany currently faces are comparable to previous recessions.

“Germany’s situation today is decisively different from the troubles of 1995-2004. First, Germany has record employment rates, high labor demand, and the most comfortable financial position among all major advanced economies. This makes adapting to shocks much easier,” senior Holger Schmieding said. Economists at Berenberg wrote in a note in August.

The latest economic forecasts point to a general slowdown across the region. The EU27 economies are now expected to grow at an average rate of 0.8% this year. This is lower than the estimate made in May of 1%.

Going into next year, the picture also looks more pessimistic than previously expected. The European Union is expected to grow by 1.4% instead of the May estimate of 1.7%.

The European Commission said in a statement on Monday: “Weak domestic demand, especially consumption, shows that high and continuing to increase consumer prices for most goods and services are causing heavier losses than expected.”

High inflation remains one of the bloc’s main challenges. The latest projections show that consumer prices will decline in the coming months, but are likely to be above the European Central Bank’s target of 2% by the end of 2024.

Headline inflation in the eurozone, where 20 EU countries share the same currency, is expected to reach 5.6% in 2023 and then 2.9% by the end of 2024.

“Services inflation has so far been firmer than previously expected, but is set to continue to moderate as demand declines under the influence of monetary policy tightening and post-Covid support fading,” the Commission said.

He warned that price pressures may last longer. The European Central Bank is scheduled to meet on Thursday and announce whether it will raise interest rates again. Since July 2022, the central bank has increased interest rates by 4.25 percentage points in an attempt to reduce historically high inflation in the region.