What are the biggest challenges facing the German economy in 2024?

Germany is facing an uphill economic battle in 2024.

Its GDP growth is expected to decline by 0.6% this year, with stagflationary pressures weighing heavy and the threat of a “slowcession” looming large, as indicated by falling manufacturing activity. 

The automobile industry, one of the jewels in the German industrial crown, is also poised to struggle, while budgetary constraints are expected to create further problems for households and consumers.

Bad news for German GDP

Some of the world’s major economic organisations have already made gloomy forecasts for Germany’s GDP in 2024.

It’s set to be the only major world economy to shrink this year, according to the International Monetary Fund’s (IMF) latest report, reinforcing its status as the most prominent example of weak growth among major European countries.

Added to this, the OECD predicts that Germany could suffer a huge blow from a ‘slowdown in the world economy’, due to weakening trade and higher interest rates worldwide that spilled over into the new year.

Owing to economic stagflation – persistent high inflation combined with high unemployment and stagnant demand – Germany went through a similar downturn at the end of 2022 and the beginning of 2023, and as such, most economic outlooks are forecasting that its economy will decline by 0.6% this year.

‘Sinking into slowcession’

The year 2023 was deemed a year of stagnation for Germany, with news outlet The Guardian going as far as to question whether it had sunk into a ‘slowcession’, owing to the detrimental mix of persistent inflation and stalling growth.

To put it into context, the fourth quarter of 2022 saw government spending decline by 0.2%, whereas in the first quarter of 2023, it was significantly more at 1.9%.

Similarly, it’s worth noticing that due to a void in the economic sector, around 2.6 million people remained unemployed in 2023. The figure in 2022 was comparatively lower, standing at 191,000.

The rate of unemployment is due to get worse in the coming year if economic conditions remain the same in Germany.

Going up against China

As Europe’s biggest automobile market, Germany’s automotive sector is the ace up the country’s sleeve. 

Yet despite being the powerhouse of mobility innovation, Germany’s automobile industry seems to be grappling with one of the major challenges of decline: competing with China.

While Germany’s automobile sector boasts a unique blend of infrastructure, state aid, manpower and industry expertise, it’s unable to outclass China’s technological and industrial strength.

Currently, Germany’s industry is not at the cutting edge of e-mobility and seems to be on the decline. 

According to Germany’s Federal Motor Transport Authority (KBA), almost 98% of cars are still powered by combustion engines, hence most analysts believe Germany’s plan to get around 15 million electric vehicles on the road by 2030 is ‘overambitious’ and unachievable.

Due to budgetary constraints, German industry is not able to challenge China’s market dominance, hence investments are being postponed. Maintaining an electric vehicle market share of almost 40%, China is forcing Germany to remain dependent on its manufactured goods like battery cells.

Budget crisis

In mid-November 2023, Germany’s Constitutional Court overturned the government’s reallocation of around €59.15 billion in COVID-19 loans for to revamp the economy. 

The government planned to use the budget to drag up the falling economy, yet the court’s ruling blew a bigger hole in the government’s plans.

It had the added effect of causing a major uproar among consumers and entrepreneurs who weren’t prepared for the economic blow.

Weather buffeting the economy

Adverse weather and climate change are likely to put a dampener on the German economy too.

The country witnessed heavy rainfall and widespread flooding last year, with such conditions expected to continue in 2024 as well. The downpours are partly due to the El Niño weather phenomenon, which causes more rain in low-lying regions. 

Such uneven weather patterns impact Germany’s energy sector, particularly regarding oil and gas production.

A spokesperson for Germany’s National Meteorological Service said that El Niño is a “major influence that is not exactly predictable”, adding to the uncertainty that is likely to wreak havoc with the German economy.

Together these five challenges do not present an exhaustive list of issues that the country might face in 2024. With three open geopolitical fronts – Russia-Ukraine, the Middle East war and the escalation in the Red Sea – the chance of another energy crisis always looms close.