Germany ‘in permanent crisis’ as property market crumbles

Germany is on the brink of recession as manufacturing and property crises engulf the eurozone’s biggest economy.

The German economy shrank by 0.3pc in the final quarter of 2023, according to the Federal Statistical Office, as investment in construction and machinery tumbled.

It follows six months of flat output, meaning Germany has not grown since the opening months of 2023. The economy shrank by 0.3pc over 2023 as a whole.

Activity is declining after German industry was cut off from cheap Russian energy and as demand from China wanes. Car factories have also struggled with disruption to parts coming through the Red Sea.

Adding to the country’s woes, the housing market is in trouble.

Property prices are falling and developers are cancelling projects, prompting a downturn in the construction industry.

Train strikes threaten an even tougher start to 2024, raising the prospect that GDP will shrink again in the opening quarter of the year and tip the country into a formal recession.

Carsten Brzeski, economist at ING, said the German economy was in “permanent crisis mode”.

He said: “With an average quarterly growth rate of 0pc since the second quarter of 2022, the German economy is anything but fast-growing.

“The best way to describe the state of the German economy is probably that it is in a shallow recession. In fact, the economy remains stuck in the twilight zone between recession and stagnation.”

Elsewhere, the French economy continues to flatline, recording its second consecutive quarter of no growth. Retail sales and hospitality struggled, while business investment also slumped as high interest rates pushed up companies’ financing costs.

The country may struggle to end the slump in 2024, with farmers laying siege to Paris and other major cities in protest against EU rules and red tape.

By contrast, growth in Spain and Italy both accelerated in the final months of 2023 with growth of 0.6pc and 0.2pc respectively. Spain in particular has been a star performer, boosted in part by a powerful recovery in tourism.

The performance on the peripheries helped the eurozone avoid recession by the slenderest of margins. It recorded no growth in the fourth quarter, according to Eurostat, after a 0.1pc contraction in the previous three month period.

Over 2023 as a whole, eurozone GDP grew by 0.5pc.

Diego Iscaro, economist at S&P Global Market Intelligence, said: “The outlook for 2024 continues to be challenging amid faltering demand and increasing geopolitical tensions.

“We think that eurozone activity will remain virtually stagnant during the first half of 2024.”

The International Monetary Fund (IMF) slashed its forecasts for Germany’s growth this year, predicting GDP will expand by 0.5pc over 2024 – a cut from the 0.9pc previously predicted in October.

That represents the biggest downgrade of any G7 economy.

France is set to grow by 1pc, down 0.3 percentage points on earlier predictions, while the eurozone as a whole will grow 0.9pc, down from the 1.2pc forecast three months ago.

The IMF said that while much of the world proved more resilient than expected through the second half of 2023, “the rising momentum was not felt everywhere”.

It added there was “notably subdued growth in the euro area, reflecting weak consumer sentiment, the lingering effects of high energy prices, and weakness in interest-rate-sensitive manufacturing and business investment”.