Germany faces economic stagnation and GDP contraction in 2023.

The German economy is facing a period of stagnation that has been exacerbated by the recent contraction of Gross Domestic Product (GDP) by 0.1% during the second quarter of 2023. This figure, which has surprised both economists and analysts, comes in a context where at least stagnation or slight growth was expected. The Federal Statistical Office of Germany has released this data, which reflects the weakening of the largest economy in the eurozone and its growing lag behind other countries in the European Union. Germany, which had been showing growth just above the European average, now finds itself in a more complicated situation. While its GDP contracts, nations like Spain, with a growth of 0.8%, and Ireland, reaching 1.2%, are proving to be the engines of the European economy. This contrast is significant and highlights Germany's inability to recover from the economic crisis that has been shaping its trajectory since last year. The stagnation of the German economy is not new. Since the spring of 2022, growth has fluctuated but has consistently remained at levels just above zero. Klaus Wohlrabe, head of surveys at the Ifo economic institute, has indicated that no substantial improvement is anticipated in the third quarter of 2023, suggesting that the German economy remains trapped in a prolonged crisis. This outlook is concerning, especially considering that growth in the first quarter was just 0.2% and that a contraction of 0.4% was recorded in the fourth quarter of 2022. Through the Business Climate Index, Ifo has published that the outlook for German companies is pessimistic. The assessment of the current situation has fallen to its lowest level since September 2020, indicating a lack of confidence in economic recovery. The situation could become even more complicated given that the business climate, according to Robin Winkler, chief economist for Germany at Deutsche Bank Research, appears to be experiencing a "summer break" in its recovery. The stagnation of the German economy can be attributed to a combination of internal and external factors. Although some energy-intensive industries have managed to increase their production, most of the manufacturing sector is stagnant. Demand has been very weak, and after the accumulation of orders during the pandemic, companies are now dealing with a decline in new orders that has persisted for five months. The outlook is further complicated by the weakness of the global economy and high energy prices compared to other international standards. Although wages are rising faster than prices, German households have chosen to save rather than consume, which has hindered the recovery of private consumption that many economists expected to be the engine of growth. Despite expectations of a slight boost in the third quarter, reflected by the Bundesbank, Ifo surveys indicate that the business climate continues to deteriorate, especially in sectors related to consumption and retail. Positive figures in car sales and the temporary impact of the Euro 2024 do not seem sufficient to change the overall trend. Aware of this situation, the German government recently launched a "growth initiative" aimed at reversing this path of stagnation. Chancellor Olaf Scholz, along with his Green and Liberal partners, has designed 49 measures to increase growth by half a percentage point next year. This strategy focuses on the need for more skilled labor and the reduction of bureaucracy. However, the reception of this initiative has been cautious among economists. Many believe it is unlikely that the implemented measures will achieve the expected increase in potential growth. Stefan Kooths, Head of Economic Research at the Kiel Institute for the World Economy, has expressed skepticism about this, noting that the target of a 0.5% increase in growth is ambitious and difficult to achieve. With the German economy trapped in this cycle of weakness and without clear signs of recovery, the future of Europe's largest economy appears uncertain. The decisions made by the government and the business sector in the coming months will be crucial in determining whether Germany can once again become the engine of the eurozone or, on the contrary, will continue to lag behind its European partners.