By Ed Frankl


Germany's economy contracted for a second straight year in 2024, underlining the scale of the challenge that will face a new government after elections due in February, including the possibility of fresh tariffs on its exports to the U.S.

Economic output in Europe's largest economy sank 0.2% last year after it declined 0.3% in 2023, the first two-year contraction since 2003, according to Germany's federal statistics agency Destatis on Wednesday.

That performance is in stark contrast with the U.S., where growth has been surprisingly rapid over the same period. But Germany has also lagged behind many of its European peers, and especially Spain.

"There are many, many reasons holding back German growth," said Salomon Fiedler, an economist at Berenberg Bank. "Probably we are not going to go back to the growth rates we have seen in recent decades."

Germany's economy was a success story for a decade and a half, growing faster than its European peers as it equipped China's factories with machines and tools it made using cheap energy from Russia.

But the economy began to falter in 2018, the year in which the then-U.S. President Donald Trump confirmed a global turn toward increased protectionism by raising tariffs on imports from China and a number of other countries, including the European Union. At the same time, German exporters faced increasingly tough competition from Chinese counterparts in the more technologically advanced sectors they had previously dominated.

It suffered a further blow when its recovery from the Covid-19 pandemic was hobbled by a sharp rise in energy costs following Russia's full-scale invasion of Ukraine.

That series of setbacks left industrial production 15% lower in November than its record high in 2017. That came alongside the inflationary shocks in 2023 that affected consumers around the world.

The car industry, which supports hundreds of thousands of jobs in Germany, also failed to adapt to electric-vehicle production as fast as rivals in the U.S. and China. Workforces are set to be cut at auto giant Volkswagen as well as at parts makers Bosch and Schaeffler.

While car production was flat in 2024 compared with the year before, it was 12% lower than in 2019, the VDA industry lobby group says.

Outside the auto industry, Intel recently delayed construction of a chip plant in the eastern city of Magdeburg, while a tie up between Germany's second-largest lender Commerzbank and Italy's UniCredit is facing government opposition.

Germany's gross domestic product has been flat since the end of 2019, while the rest of the euro area has grown by 5%, and the U.S. economy has expanded 11%, according to Goldman Sachs research.

A moribund economic performance is set to persist, at least in the short term. Germany's central bank, the Bundesbank, forecasts just 0.2% growth in 2025, while others are even more pessimistic. The Kiel Institute for the World Economy expects the economy to stagnate this year.

Now threats of U.S. import tariffs by the incoming Trump administration could drag the export-driven economy further. The tariffs could cost Germany between 0.6 and 1.2 percentage points of GDP, Goldman Sachs said.

"We don't know for sure what the Trump Administration is going to do," Stefan Kooths, the Kiel Institute's head of forecasting, told The Wall Street Journal. "We can only have a guess."

However, protectionist policies from the U.S. would appear to have a more significant negative impact on Germany than other nations, Kooths argued.

The economic performance will likely be at the forefront of Germans' minds when they head to the polls in national elections next month. The vote is taking place after the governing coalition of embattled Chancellor Olaf Scholz collapsed amid bickering over public borrowing.

Germany has a constitutionally enshrined fiscal rule that restricts all but a small budget deficit each year. Some economists predict that under a new government, perhaps under frontrunner Friedrich Merz of the centre-right Christian Democrats, spending could be loosened and therefore prompt more leeway for public investment, particularly on defense spending. Merz might also offer more pro-business policies including lower corporate taxes and rolling back some environmental policies.

"In general, we need more trust in freedom, the market economy and entrepreneurship instead of detailed regulations, excessive reporting obligations and permanent subsidies," Thilo Brodtmann, executive director of Germany's VDMA machinery and equipment manufacturers association said ahead of the GDP data.

Lower interest rates as expected this year from the European Central Bank, which meets later in January, could also prompt more stimulation of the economy. Should Trump's trade policies be implemented, an ensuing strengthening of the U.S. dollar might also see Germany's exports become more attractive.

However, far-right or far-left parties could become spoilers should elections end in a fractured parliament, especially judging no party is polling close to a majority. Elon Musk, a close adviser to President-elect Trump, backed the far-right Alternative for Germany in an op-ed for a German newspaper.


Write to Ed Frankl at edward.frankl@wsj.com


(END) Dow Jones Newswires

01-15-25 0416ET