Economics Update December 2023 - German economy at the turn of the year: Between hope and scepticism

The major concern about an energy crisis, which dominated the headlines just a year ago, is no longer an issue now, at the end of 2023 and with a view to the upcoming winter. Nevertheless, the economic situation in Germany only appears to be better than a year ago. In fact, economic output in the third quarter of 2023 was almost exactly at the same level as at the end of 2022. Current economic indicators point to continued stagnation, which underlines the need for political and economic adjustments. 

Declining export momentum

The outlook for 2024 remains gloomy overall. One of the main reasons for this is the high level of uncertainty surrounding the future development of the global economy. Weak demand from the key markets of the USA and China is limiting the export prospects of German companies. A turnaround is not in sight here. Hardly any positive impetus can be expected from China, and the US economy is threatened by a moderate recession in the coming year, or at least a significant slowdown in growth momentum. If exports to the two most important trading partners outside the EU weaken, this does not bode well for exports as a whole.

Domestic market under interest rate pressure

The restrictive monetary policy of the European Central Bank is having an increasingly negative impact on the domestic market. The proportion of companies that see financing bottlenecks as a major obstacle to production is still low. However, almost 40% of industrial companies are now complaining of a lack of orders and, together with significantly higher interest rates, this is not a good prerequisite for higher investment in equipment. In the construction sector, existing orders in civil engineering and existing buildings are still cushioning the declines in other areas, but the fall in residential building permits by more than 30%, the almost halving of residential construction loans to households and the significant drop in turnover for property developers and project developers do not bode well for construction investment overall.

Uncertainty puts the brakes on private consumption 

With regard to private consumption, the rising purchasing power of households should lead to a noticeable increase in private spending due to falling inflation. However, this is countered by persistently very poor consumer sentiment, which is well below the level seen in spring 2020 at the start of the coronavirus pandemic. Now that the Federal Constitutional Court has ruled that the traffic light government's plans to finance the climate and transformation fund violate the constitution, not only are numerous projects in the context of the planned energy transition on the back burner. There is now also generally increased uncertainty about the development of taxes and the continued existence of subsidies. All of this is paralysing private households' desire to spend. Government consumption will also suffer from the imposed budget freeze.

The government is challenged 

Only a marginal increase in economic output is expected for 2024. Germany is therefore at risk of falling into a disastrous cycle: The economic slump, which will then have lasted for five years, will exacerbate existing distribution conflicts and slow down the possibilities for financially cushioning necessary structural adjustments, and this in turn will further slow down economic momentum. It remains to be hoped that the traffic light government will find the strength to cut through this knot by systematically improving the general framework conditions and cancelling non-essential government spending.