Germany’s economy shrinks by 0.3% in 2023

Europe’s largest economy contracted by 0.3% year-on-year in 2023, as high inflation and firm interest rates bit into growth, the Federal Statistical Office of Germany said Monday.

The estimate is in line with the expectations of analysts polled by Reuters. The decline in economic output eases to 0.1% when adjusted for calendar purposes.

“The overall economic development in Germany stalled in 2023 in the still crisis-ridden environment,” said Ruth Brand, president of the federal statistics office, according to a Google translation. 

“Despite the recent declines, prices remained high at all levels of the economy. Added to this were unfavorable financing conditions due to rising interest rates and lower demand from home and abroad,” Brand added.

The manufacturing sector, excluding construction, fell by a sharp 2%, led by lower production in the energy supply sector.

The fourth quarter recorded a similar 0.3% drop compared with the July-September period. The office said that the German economy stagnated in the third quarter, implying the country has narrowly avoided a technical recession that is defined by two successive quarters of consecutive GDP declines.

The German economy faced the throes of a deep budgetary crisis at the end of last year, after a constitutional court ruling over the national borrowing restrictions threatened a $17-billion-euro gap in the country’s 2024 spending plans.

Enshrined in Germany’s constitution, the national debt brake restricts the federal deficit to 0.35% of GDP outside of emergencies and became a major bone of contention in national politics last year. The German government agreed to suspend the limit on borrowing, after the constitutional court blocked attempts to repurpose any leftover emergency funds initially assigned to address the Covid-19 pandemic.

Weeks-long negotiations yielded a budget deal that retains debt restrictions into 2024, with the government expecting to save 17 billion euros ($18.6 billion) in its core budget by ending climate-damaging subsidies and implementing cost cutting, German Chancellor Olaf Scholz’s three-way coalition announced in mid December.

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