Germany in technical recession, says Bundesbank

The German economy stood unruffled even as the rest of European countries were buffeted by market turbulence of some kind or another. But it seems that even Germany cannot remain immune from the economic slowdown that is hampering the rest of Europe.

Germany’s central bank, the Bundesbank, has said in its monthly report that in the first quarter of 2024, Germany would not register an uptick on any of the indicators. The bank said in in its monthly report, “There is still no recovery for the German economy. Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.”

German economy shrank by 0.3 per cent in the last quarter of 2023 and also for the whole of 2023. But it is not as gloomy as it appears. The bank is confident that this would be a short and not a long recession. Germany has been affected by the disruption caused by the war in Ukraine. The bank said, “The weak phase in the German economy that has been ongoing since the beginning of the Russian war of aggression against Ukraine will thus continue.”

The reasons for the slowdown and the technical recession are due to the fact that foreign demand for German manufactures is in decline. The high interest rates of the European Central Bank (ECB) is holding back fresh business initiatives through private investment. And consumers are holding back on their spending. These three factors combine to pull back economic activity and growth in Germany.

There are also other issues. The critics feel that Germany has to move away from its stolid industrial base and think of shifting the economic model. This is easier said than done. Germany cannot overnight move into the services sector, or even into digital economy through AI and other modes. It has remained a solid economy because of its old-fashioned manufacturing base.

There are however inherent problems in the industry. It has been observed that the German industries are producing less than they sell, and that they are ordering less from the suppliers than they need. It is a clear sign of caution, a negative market sentiment. But there is the expectation and the hope that there will be a rebound in the economy Easter onward in April. The growth however will still remain modest because the global markets are not in an expansive mood. The slowdown in China, for example, has had an impact on German industrial goods exports. The German economy has been the mainstay of Europe, and if it were to show signs of slowdown, then the rest of Europe and the world will be impacted.

It was inevitable that geo-political tension like the one in Ukraine is sure to impact countries like Germany because it has grown because of the general peace in Europe since the end of the Second World War. If Europe were to get drawn into conflict zones either in Europe or beyond, then it will be difficult for Germany to remain either a silent spectator or maintain its economic immunity.

Germany is however hesitant to take political responsibility beyond its borders because it is careful not to evoke memories of a Germany in the first half of the 20th century when it played the role of the dominant European power. This is similar to the hesitation shown by Japan to be too active on the global stage. Japan was again an aggressor in the first half of the 20th century. Germany is content to mind its own business and let its economy grow. It may be difficult for Germany to be politically neutral and sustain its economic prosperity.