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Financial News: German Economy Contracts In 2023

German Economy Contracts In 2023

01/15/2024 - 08:20:00 (RTTNews)

(RTTNews) - The German economy contracted for the first time in three years in 2023 as a toxic mix of persistently high inflation, rising interest rates and the weak global demand pushed activity into a recessionary phase. Gross domestic product shrank 0.3 percent sequentially, in contrast to the 1.8 percent expansion seen in 2022, the statistical office Destatis reported Monday. This was the first decline since 2020.

On a calendar adjusted basis, GDP shrank 0.1 percent, in contrast to the 1.9 percent expansion in 2022.

"Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises", Destatis President Ruth Brand said at the Berlin press conference.

"Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth," Brand said.

Moreover, the unfavorable financing conditions caused by rising interest rates and weaker domestic and foreign demand took their toll.

Brand said the German economy did not continue its recovery from the sharp economic slump experienced in the pandemic year of 2020. GDP was 0.7 percent higher in 2023 than in 2019, the year before the Covid-19 pandemic hit.

According to the information available so far, GDP fell by 0.3 percent in the fourth quarter on the previous quarter after adjustment for price, seasonal and calendar variations.

The biggest euro area economy's GDP had stagnated in the third quarter.

There was a mixed performance among individual sectors on the production-side of GDP.

Industry excluding construction contracted 2.0 percent due to much lower output in the energy sector.

Manufacturing, which accounts for almost 85 percent of industry, was in the negative territory in 2023.

While the automotive industry and the manufacture of other transport equipment contributed positively, the value added in energy-intensive industrial branches shrank after suffering from rising prices in 2022.

The construction industry posted a moderate growth of 0.2 percent in 2023.

Most service branches expanded their economic activities compared with the previous year and helped the economy in 2023.

On the expenditure-side, household consumption dropped 0.8 percent as high consumer prices damped spending power.

In addition, general government reduced their expenditure for the first time in almost 20 years, largely reflecting the discontinuation of state-financed Covid-9 measures.

Government consumption dropped 1.7 percent.

Gross fixed capital formation in construction declined 2.1 percent in 2023. The marked rise in interest rates as well as high construction prices put a damper on housing construction.

By contrast, gross fixed capital formation in machinery and equipment increased 3.0 percent, mainly attributable to the increase in commercial new registrations of passenger cars.

Both imports and exports contracted 3.0 percent and 1.8 percent, respectively. This produced a positive balance of exports and imports, which supported the GDP.

The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year, Capital Economics' Andrew Kenningham said.

The economist forecast zero GDP growth in 2024.

The International Monetary Fund forecast the largest euro area economy to shrink 0.5 percent in 2024.

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