Germany suffers another ‘sick man of Europe’ setback as GDP falls for second year in a row while Brexit UK has seen growth with positive 2025 forecast despite Labour budget chaos

Germany’s economy shrank for the second year in a row in 2024, preliminary figures released today showed, just weeks before a crucial snap election.

The Federal Statistics Office said today that Europe’s largest economy had contracted by 0.2 per cent, continuing a slump started by a similar decline in 2023.

The German economy has been battered by external shocks and homegrown problems, including bureaucracy and a shortage of skilled labour – issues at the heart of campaigns for candidates promising to reinvigorate the German economy if elected next month.

Ruth Brand, president of the Federal Statistics Office, touched on key issues in her assessment, blaming ‘cynical and structural pressures’ and alluding to ‘increasing competition’ for German exports, and rising energy costs.

Britain faces similar woes in productivity, but managed to record estimated growth of 0.1 per cent between July and September last year, before shrinking 0.1 per cent in October.

Britain’s growth continues on a slow trajectory of recovery from the pandemic, levelling off at 0.3 per cent in 2023 as the German economy shrank by the same amount.

Chancellor Rachel Reeves yesterday dismissed calls for her resignation amid mounting pressure to deliver results, assuring MPs that her plans for the economy can deliver an ‘immense’ prize given time.

Despite the mixed reception over Labour’s first budget, researchers expect the UK could still make steady progress in 2025.

Goldman Sachs’ economists forecasted late last year that the economy would grow 1.2 per cent this year, behind the Bank of England’s projection of 1.5 per cent and some way behind KPMG’s assessment of 1.7 per cent.

Volkswagen employees in Germany rally to warn of a strike as the company threatened site closures and demanded 10 per cent wage cuts, December 9, 2024

German Chancellor Olaf Scholz takes his seat for the weekly cabinet meeting at the Chancellery in Berlin on January 15

German Chancellor Olaf Scholz takes his seat for the weekly cabinet meeting at the Chancellery in Berlin on January 15

Rachel Reeves speaks to MPs in the House of Commons on January 14, 2025

Rachel Reeves speaks to MPs in the House of Commons on January 14, 2025

The German Federal Statistical Office said today that gross domestic product contracted by 0.2% last year following a decline of 0.3 per cent in 2023.

The head of the office, Ruth Brand, said that it’s believed to have shrunk by 0.1% in the fourth quarter compared with the previous three-month period.

The figures are still only a rough initial estimate as hard economic data for December haven’t been released yet.

‘Germany is experiencing the longest stagnation of its postwar history by far,’ Ifo economist Timo Wollmershäuser told the FT in light of the emerging figures.

The economy faces pressure to reform amid increased competition from international producers and against the wider backdrop of de-industrialisation.

Underscoring the issue, workers at Volkswagen factories across the country began strikes last month after the manufacturer aired calls for lower wages and threatened to close factories.

It is the first time the company has suggested it could close factories in Germany in its 87-year history, illustrating a wider trend in Europe of stiff competition from foreign producers, high production costs and a slow uptake of electric vehicles supported by government initiatives. 

Election campaign posters showing Green Party top candidate, Robert Habeck, top, and Friedrich Merz of the CDU, on display prior to the upcoming elections, in Berlin, January 13

Election campaign posters showing Green Party top candidate, Robert Habeck, top, and Friedrich Merz of the CDU, on display prior to the upcoming elections, in Berlin, January 13

Friedrich Merz speaks during a press conference at the CSU closed-door meeting at the Seeon Monastery in Seeon-Seebruck, January 8

Friedrich Merz speaks during a press conference at the CSU closed-door meeting at the Seeon Monastery in Seeon-Seebruck, January 8

Germany will hope the result of its early election on February 23 may yield some of the answers.

Chancellor Olaf Scholz’s three-party coalition government collapsed in November when Scholz fired his finance minister in a dispute over how to revitalize the economy.

Friedrich Merz, his likely successor, with the centre-right Christian Democratic Union, has campaigned on a promise of cutting red tape and slimming benefits for those out of work.  

Germany has not had the same recovery from the pandemic as Britain, though felt the immediate impact less strongly and has had less distance to climb.

Comparative data from the FSO shows the German economy took a knock of 4.1 per cent in 2020, at the height of the Covid-19 pandemic and associated lockdowns.

Germany then recovered ground in 2021, with a boost of 3.7 per cent to GDP.

A year later this slowed to just 1.4 per cent, before contracting 0.3 per cent in 2023.

Britain, by contrast, shrank 10.3 per cent in 2020 before recovering 8.6 per cent in 2021.

Growth in 2022 was estimated at 4.8 per cent, and 0.3 per cent in 2023. Data for the whole of 2024 has not yet been published by the Office for National Statistics.

Downward contributions to CPIH inflation from five divisions, led by restaurants and hotels

Downward contributions to CPIH inflation from five divisions, led by restaurants and hotels

The Chancellor has assured that her economic plans will reap rewards in time, telling MPs yesterday: ‘If we get it right, the prize on offer to the British public is immense.’

She said that recent turmoil in the bond market, affecting UK borrowing, only reflected a wider pattern of ‘global economic uncertainty’.

There has been a felt sell-off of government bonds around the world in recent weeks, linked in part with concern that Donald Trump could impose harsh tariffs, driving up inflation.

Britain appears better equipped going into the new year, having recorded a recent lull in inflation, down to 2.5 per cent in December.

The move will make it easier for the Bank of England to justify cutting interest rates on February 6, still held at 4.75 per cent.

While lower interest rates may encourage borrowing, analysts still fear Britain could be headed for stagflation, with growth low despite prices rising.

The Chancellor will also have to try to reassure the bond market with UK borrowing rising to its highest since 2008.

While Reeves has promised not to repeat the Budget’s £40bn tax rises in an effort to repair public finances, economists have suggested higher taxes or lower spending could still be needed to balance the books. 

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