German economy shrinks as consumers shy away from spending

Germany’s economy took a step back in the second quarter of 2024, with the gross domestic product contracting by 0.1%, according to final figures released Tuesday by the Federal Statistical Office.

This downturn, following a modest 0.2% growth in the first quarter, signals growing concerns of an impending recession if economic conditions do not improve in the current quarter.

“After the slight increase in the previous quarter, the German economy slowed down again in spring,” stated Ruth Brand, President of the Federal Statistical Office, highlighting the fragility of Germany’s economic recovery.

Compared to a year earlier, the German economy showed no growth, having last recorded year-on-year expansion in the first quarter of 2023.

Consumer spending and investments weaken

The economic decline was largely driven by a reduction in household consumption and investment. Household final consumption expenditure fell by 0.2%, reversing the gains seen earlier in the year. On the other hand, government final consumption rose by 1.0% from the previous quarter.

Investments showed significant weakness underscoring the hesitancy of businesses to commit to new projects amid growing economic uncertainty.

Gross fixed capital formation, a measure of investment in physical assets, saw a steep decline. Investment in machinery and equipment dropped by an annualized 4.1%, while construction investment fell by 2.0% on the quarter.

Foreign trade, typically a strong point for the German economy, also failed to provide any positive momentum. Exports of goods and services declined by 0.2% compared to the first quarter of 2024, reflecting weaker global demand and supply chain disruptions.

Sector-wise, the construction activity faced significant challenges, contracting by 3.2%. The downturn in building construction and completion work highlights the broader slowdown in one of Germany’s most critical industries.

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

Germany lags behind peers

 Germany’s economic performance in the second quarter of 2024 was notably weaker than that of other major economies. 

The European Union as a whole grew by 0.3% during the same period, with Spain leading the way with a 0.8% real growth. France and Italy also posted modest gains of 0.3% and 0.2%, respectively. 

Meanwhile, across the Atlantic, the United States recorded a 2.8% economic growth, further highlighting Germany’s sharp underperformance.

Consumer confidence plummets

Adding to the gloomy economic outlook, a separate report released on Tuesday by the GfK revealed a sharp decline in consumer confidence. 

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The forward-looking Consumer Climate index fell by 3.4 points to -22.0 in September, as income and economic expectations weakened significantly, and the willingness to spend also dropped.

“Apparently, 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,” noted Rolf Buerkl, a consumer expert at the Nuremberg Institute for Market Decisions (NIM). 

He added that “negative news about job security is making consumers more pessimistic, and a fast recovery in consumer sentiment seems unlikely”.

The deteriorating consumer sentiment reflects broader concerns about Germany’s economic future. The Federal Employment Agency recently reported a slight increase in unemployment rates, with the number of people registered as unemployed currently around 200,000 higher than a year ago.

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The combination of a weakening economy, planned job cuts in key industries, rising insolvencies, and the increasing risk of a recession has created an atmosphere of uncertainty and economic pessimism that is likely to persist in the coming months.

Kyle Chapman, FX analyst at Ballinger Group said: “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.”