Germany's economy shrinks as consumers avoid spending.
The German economy shrank by 0.1 per cent in the second quarter of the year, raising fears of a recession. Consumer confidence has fallen, investment has weakened and the economy has fallen sharply behind other major countries, a Euronews analysis says.
Germany's economy took a step back in the second quarter of 2024, with gross domestic product contracting by 0.1%, according to final data released on August 27 by the Federal Statistical Office.
That decline, which followed modest growth of 0.2% in the first quarter, signalled growing fears of an impending recession if economic conditions do not improve in the current quarter.
"After a slight increase in the previous quarter, the German economy slowed down again in the spring," said Ruth Brandt, head of the Federal Statistical Office. He also highlighted the fragility of Germany's economic recovery.
Compared to a year earlier, the German economy reported no growth, last registering year-on-year expansion in the first quarter of 2023.
The economic downturn was largely due to reduced household consumption and investment. Household final consumption expenditure fell 0.2%, reversing the growth seen earlier in the year. On the other hand, the final consumption of the "government" sector increased by 1.0% compared to the previous quarter.
Investment showed significant weakness, highlighting the reluctance of businesses to commit to new projects amid growing economic uncertainty.
Gross fixed capital formation, a measure of investment in physical assets, fell sharply. Investment in machinery and equipment fell 4.1% year-on-year, and investment in construction fell 2.0% for the quarter.
Foreign trade, normally a strong point of the German economy, also failed to provide a positive boost. Exports of goods and services fell 0.2% from the first quarter of 2024, reflecting weaker global demand and supply chain disruptions.
Sectorally, construction activity faced significant challenges, contracting by 3.2%. The decline in building construction and finishing underscores the broader slowdown in one of Germany's most critical industries.
Despite the economic downturn, employment trends remained positive. The number of persons employed increased by 0.4% compared to the second quarter of 2023. In addition, average gross wages per person employed increased by 5.1% year-over-year, providing some relief to workers amid rising inflation and economic uncertainty.
Germany's economic performance in the second quarter of 2024 was significantly weaker than that of other major economies.
The European Union grew by 0.3% over the same period, led by Spain with a real growth of 0.8%. France and Italy also saw modest growth of 0.3% and 0.2% respectively.
Meanwhile, the United States posted 2.8% economic growth across the Atlantic, further underscoring Germany's sharp lag.
Adding to the gloomy economic outlook was a separate report published on August 27 by GfK that revealed a sharp decline in consumer confidence.
The Prospective Consumer Climate Index fell 3.4 points to -22.0 points in September as economic and income expectations weakened significantly and willingness to spend also fell.
"The euphoria of German consumers caused by the European Football Championship was only a short-lived burst and subsided after the end of the tournament," noted Rolf Bürkl, a consumer affairs expert at the Nuremberg Institute for Market Solutions (NIM).
He added that "negative news about job security is making consumers more pessimistic and a quick recovery in consumer sentiment looks unlikely."
Worsening consumer sentiment reflects broader concerns about Germany's economic future. The Federal Employment Agency recently reported a slight increase in the unemployment rate, with the number of people currently registered as unemployed about 200,000 more than a year ago.
The combination of a weakening economy, planned job cuts in key industries, a growing number of bankruptcies and an increasing risk of recession has created an atmosphere of uncertainty and economic pessimism that is likely to persist in the coming months.
"The German economy is struggling to gain enough strength to break out of stagnation, and confidence polls have started to turn sharply in the wrong direction. In the first quarter, we were fooled by some optimistic data, but in the end, weak external demand, fiscal flexibility and structural problems in the labour force had a big negative impact. The 'sick man of Europe' label is likely to stick around for some time to come," said Kyle Chapman, currency analyst at Ballinger Group. | BGNES
