Germany’s Economy Contracts for Second Year Amid Political Crisis

German Chancellor Olaf Scholz (C) arrives for the weekly cabinet meeting at the Chancellery in Berlin on January 15, 2025. Photo: John MACDOUGALL / AFP

Germany’s economy shrank for the second consecutive year in 2024, with official data revealing a 0.2% decline in gross domestic product (GDP), following a 0.3% contraction in 2023. 

Preliminary figures also showed a 0.1% contraction in the final quarter of 2024, reflecting persistent economic struggles in the eurozone’s largest economy. Destatis, the federal statistics agency, attributed the downturn to structural and recurring pressures, including rising energy costs, high interest rates, and declining demand in key export markets such as China.

The manufacturing sector, a cornerstone of Germany’s economy, has been particularly impacted by elevated energy costs, while a shortage of skilled workers continues to hamper growth. Destatis chief Ruth Brand noted that the economy faces increasing competition in global markets, compounding its challenges amidst an uncertain economic outlook.

Political instability is adding to the economic woes. The collapse of Chancellor Olaf Scholz’s coalition government has triggered early elections, scheduled for February 23. Analysts predict a prolonged period of political paralysis as parties negotiate a new coalition, which could delay critical economic decisions. Adding to the uncertainty, U.S. President-elect Donald Trump has threatened to impose tariffs on imports, raising concerns for German exporters already grappling with global trade disruptions.

The outlook for 2025 remains bleak, with the German central bank revising its growth forecast sharply downward in December from 1.1% to 0.2%. As Germany faces a combination of structural challenges, external pressures, and political instability, the path to recovery appears increasingly uncertain. The coming months will be pivotal for Europe’s largest economy as it navigates these complex hurdles.