Germany’s economy contracted for the second year in a row in 2024, underlining the scale of the challenge that will face a new government after elections due in February, including the possibility of new tariffs on its exports to the U.S.
Economic output in Europe’s largest economy fell 0.2% last year after it declined 0.3% in 2023, the first two-year contraction since 2003, according to Germany’s federal statistics agency Destatis on Wednesday.
That performance is in stark contrast to the U.S., where growth has been surprisingly rapid over the same period. But Germany has also lagged behind many of its European peers, especially Spain.
Increasing competition for German exports in key markets, high energy costs, interest rates that remained elevated, and an uncertain economic outlook stood in the way of economic growth in 2024, Destatis President Ruth Brand said.
“There are many, many reasons holding back German growth,” Salomon Fiedler, an economist at Berenberg Bank, said. “Probably, we are not going to go back to the growth rates we have seen in recent decades.”
Germany’s economy was a success story for a decade and a half, growing faster than its European peers as it equipped China’s factories with machines and tools it made using cheap energy from Russia.
But the economy began to falter in 2018, the year in which then-U.S. President Donald Trump confirmed a global turn toward increased protectionism by raising tariffs on imports from China and a number of other countries, including those in the European Union. At the same time, German exporters faced increasingly tough competition from Chinese counterparts in the more technologically-advanced sectors they had previously dominated.
It suffered a further blow when its recovery from the Covid-19 pandemic was hobbled by a rise in energy costs after Russia’s full-scale invasion of Ukraine.
Those series of setbacks left industrial Manufacturing declined 3% on year in 2024, while construction shrank 3.8%. This came alongside inflationary shocks in 2023 that affected consumers around the world.
The car industry, which supports hundreds of thousands of jobs in Germany, also failed to adapt to electric-vehicle production as fast as rivals in the U.S. and China. Workforces are set to be cut at auto major Volkswagen, as well as parts makers Bosch and Schaeffler.
While car production was flat in 2024 compared with the year before, it was 12% lower than in 2019, the VDA industry lobby group said.
Outside the auto industry, Intel recently delayed construction of a chip plant in the eastern city of Magdeburg, while a tie-up between Germany’s second-largest lender Commerzbank and Italy’s UniCredit is facing government opposition.
Germany’s gross domestic product has been flat since the end of 2019, while the rest of the euro area has grown by 5%, and the U.S. economy has expanded 11%, according to Goldman Sachs research.
The economy shrank in the final three months of 2024 too, Destatis said, and the moribund economic performance is set to persist, at least in the short term. Germany’s central bank, the Bundesbank, forecasts 0.2% growth in 2025, while others are even more pessimistic. The Kiel Institute for the World Economy expects the economy to stagnate this year.
“It should surprise no one that the German economy shrank again in 2024. However, what is surprising and worrying is that economic output was likely to have declined in the fourth quarter,” Deutsche Bank’s chief economist for Germany, Robin Winkler, said.
“If confirmed, the German economy would have lost further momentum at the start of the winter,” he added.
Threats of U.S. import tariffs by the incoming Trump administration could drag the export-driven economy further. The tariffs could cost Germany between 0.6 and 1.2 percentage points of GDP, Goldman Sachs said.
“We don’t know for sure what the Trump administration is going to do,” Stefan Kooths, the Kiel Institute’s head of forecasting, told The Wall Street Journal. “We can only have a guess.”
However, protectionist policies from the U.S. would appear to have a more significant hit on Germany than other nations, Kooths said.
The economic performance will likely be at the forefront of Germans’ minds when they head to the polls in national elections next month. The vote is taking place after the governing coalition of embattled Chancellor Olaf Scholz collapsed amid disagreements over public borrowing.
Germany has a constitutionally-enshrined fiscal rule that restricts all but a small budget deficit each year. Some economists predict that under a new government–perhaps under front-runner Friedrich Merz of the center-right Christian Democrats–spending could be loosened and prompt more leeway for public investment, particularly on defense spending. Merz might also offer more pro-business policies, including lower corporate taxes and rolling back some environmental policies.
“In general, we need more trust in freedom, the market economy and entrepreneurship instead of detailed regulations, excessive reporting obligations and permanent subsidies,” Thilo Brodtmann, executive director of Germany’s VDMA machinery and equipment manufacturers association, said ahead of the GDP data.
Lower interest rates expected this year from the European Central Bank, which meets later in January, could also prompt more stimulation of the economy. Should Trump’s trade policies be implemented, an ensuing strengthening of the dollar might lead to Germany’s exports becoming more attractive.
However, far-right or far-left parties could become spoilers should elections end in a fractured parliament, especially as no party is polling close to a majority. Elon Musk, a close adviser to President-elect Trump, backed the far-right Alternative for Germany party in an op-ed for a German newspaper.
“In order to finally get the economy back on track, besides containing the numerous global crises and uncertainties, what is needed above all are convincing answers from policymakers and companies to the huge transformative challenges, especially in industry,” KfW Research economist Klaus Borger said.
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