The German economy likely shrank 0.3% in the fourth quarter of 2023 amid persistent inflation, high energy prices, and slower foreign demand, figures with initial estimates from the Federal Statistical Office revealed on Monday. Official figures for the last quarter of 2023 are expected to be announced on the 30 ^th of January.

The upwardly revised third quarter helped Germany to avoid two consecutive quarters of contraction, which is a definition of a recession. For the full year, German GDP is estimated to have contracted by 0.3% from 2022, the weakest among major European countries.

According to the International Monetary Fund (IMF) Germany is likely to be the only G7 economy that registered negative growth in 2023. The IMF predicts Germany to grow 0.9% in 2024, well below the 1.4% anticipated for advanced economies.

Stagflationary pressures and prospects of a recession are building up amid falling manufacturing activity. In the whole of 2023, the industrial sector output tumbled by 2%, driven by lower production in the energy supply sector. The manufacturing output also dropped, by 0.4% due to declines in the automotive industry.

The higher interest rates from the European Central Bank (ECB) aiming to combat sky high inflation, have compressed construction of new dwellings. Despite the high borrowing costs, building activity managed to rise by 0.2%.

The service sector still grew, although slower than before, and private consumption declined by 0.8%. Investments dropped by 0.3%, government spending shrank by 1.7%, and imports fell more than exports, according to the Federal Statistical Office.

The German economy has encountered severe headwinds since Russia’s war in Ukraine, which sent inflation and the cost of energy soaring. The surge in natural gas prices for the energy-intensive industries, following the halt of previously affordable prices, played a crucial role.

Concurrently, Germany grappled with skilled labour shortages, which in addition to the global slowdown in manufacturing activity, have exerted additional pressure on the huge factory sector. The multiple crises collectively, resulted in a deceleration of economic development in 2023.

Additionally, Germany faced increased competition from China, which was a former reliable market for German products. The eurozone aggressive interest rate hikes, unfavourable financing conditions, and weak domestic and international demand, further contributed to the strain of the German economy.

Source: TradingView

While a modest recovery is expected in 2024, with the German Bundesbank central bank forecasting growth of 0.4%, the recent budget upset and potential shipping delays triggered by the conflict in the Middle East, could cloud the outlook.

In our view, this forecast may turn out to be an optimistic one, as Germany continues to deal with its recent economic crisis. Germany’s Constitutional Court shock ruling at the end of 2023 blew approximately €59 billion hole in the government budget, suspending its plans to revive the economy. Consequently, the budgets for both 2023 and 2024 were reworked.

The budgetary constraints could exert further pressure on consumer spending which has been declining throughout 2023. Additionally, a slowdown in the global economy could have an adverse impact on Germany’s exports, which had sluggish demand in 2023.

Despite the stagnating German economy, the DAX 40 index has reached a fresh all-time high of 17,003 points in mid-December 2023. As we enter 2024, the index may experience a pull back in the first quarter to unwind its strongly overbought momentum conditions; however, we see good prospects of slow and gradual recovery in the second half of the year. We remain cautiously optimistic about the stock market outlook in the year ahead and we see levels to 17,800 as achievable.