Germany’s Economy Stumbles in Q2 as Recession Fears Loom

Germany’s economy shrank by 0.1% in the second quarter of 2024, as reported by the Federal Statistical Office on Tuesday, marking a downturn from the modest 0.2% growth in the first quarter. This contraction raises concerns about a potential recession if economic conditions do not improve in the coming months.

Ruth Brand, President of the Federal Statistical Office, stated, “After the slight increase in the previous quarter, the German economy slowed down again in spring,” emphasizing the precarious nature of Germany’s economic recovery. Year-on-year, the German economy showed no growth, having last recorded an expansion in the first quarter of 2023.

The decline was primarily driven by reductions in household consumption and investment. Household spending fell by 0.2%, undoing earlier gains, while government consumption rose by 1.0% from the previous quarter. Business investment, particularly in physical assets, also showed significant weakness, reflecting growing hesitancy amid economic uncertainty. Investment in machinery and equipment dropped by an annualized 4.1%, and construction investment declined by 2.0%.

Germany’s usually robust export sector failed to provide a boost, with exports of goods and services declining by 0.2% compared to the first quarter, reflecting softer global demand and ongoing supply chain disruptions.

Construction, a key sector for Germany, faced substantial challenges, contracting by 3.2% as building construction and completion activities slowed, further underscoring the broader economic deceleration.

Despite the economic downturn, employment trends remained somewhat positive. The number of employed persons increased by 0.4% compared to the second quarter of 2023, and average gross wages and salaries per employee rose by 5.1% year-over-year, offering some relief to workers amid rising inflation and uncertainty.

Germany’s performance in the second quarter lagged behind other major economies. The European Union grew by 0.3%, with Spain leading at 0.8% growth. France and Italy posted modest gains of 0.3% and 0.2%, respectively, while the United States outpaced with a robust 2.8% growth, highlighting Germany’s relative underperformance.

Compounding the economic gloom, a report from GfK showed a sharp decline in consumer confidence. The Consumer Climate index dropped 3.4 points to -22.0 in September, reflecting weakened income and economic expectations and reduced willingness to spend.

Rolf Buerkl, a consumer expert at the Nuremberg Institute for Market Decisions, noted, “The euphoria of German consumers triggered by the European Football Championship was only a brief flare-up and faded after the end of the tournament.” He added, “Negative news about job security is making consumers more pessimistic, and a fast recovery in consumer sentiment seems unlikely.”

Broader concerns about Germany’s economic future are echoed by a recent report from the Federal Employment Agency, which revealed a slight rise in unemployment, with 200,000 more people registered as unemployed than a year ago. The combination of a slowing economy, planned job cuts in key industries, rising insolvencies, and increasing recession risks has fostered a climate of uncertainty and economic pessimism.

Kyle Chapman, an FX analyst at Ballinger Group, remarked, “The German economy is finding it difficult to gain enough traction to pull itself out of stagnation, and the confidence survey figures have begun to turn sharply in the wrong direction. We were teased by some optimistic data in Q1, but ultimately, weak foreign demand, budget rigidity, and structural workforce issues are having a big drag effect. The ‘sick man of Europe’ label is likely to stick for a while longer.”

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