German Economy Faces Decline for Second Straight Year Amid Political Turmoil

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Germany's economic landscape has deteriorated significantly, recording a decline for the second consecutive year, a trend unseen for more than two decades. Official figures indicate that the nation’s gross domestic product (GDP) fell by 0.2% in 2024, following a 0.3% drop in 2023. This marks only the second time since the 1950s that Germany has experienced two consecutive years of economic contraction, with the previous occurrence in 2002 and 2003.

The downturn is attributed to several factors, including subdued domestic demand, soaring energy prices, and stiff competition from Chinese imports. Industrial production has been notably affected, with manufacturing output declining by 3% year-on-year, driven mainly by a significant slump in the automotive and chemical sectors. Notably, Volkswagen will lay off over 35,000 workers by 2030 due to reduced demand.

The construction sector has also contracted by 3.8% as high raw material prices and elevated interest rates hinder building projects. In contrast, the services industry saw a slight expansion of 0.8%, predominantly supported by retail activity, although areas like car sales and food industries suffered losses.

As Germany prepares for snap elections on February 23, the economic challenges have spurred political uncertainty, contributing to the collapse of Chancellor Olaf Scholz's coalition government. The far-right Alternative für Deutschland party has gained traction in opinion polls, placing it as a strong contender in the upcoming elections.

Economists anticipate that the European Central Bank may continue to reduce interest rates in response to dwindling growth across the eurozone, albeit with concerns regarding persistent inflation.

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