WIESBADEN (dpa-AFX) - Germany is facing difficult months after a decline in economic output. Gross domestic product (GDP) shrank by 0.3 percent in the fourth quarter of 2023 compared to the previous quarter, adjusted for price, calendar and seasonal effects. "In the final quarter, the decline in investment slowed the economy, while consumption increased slightly," confirmed the head of the Federal Statistical Office, Ruth Brand, on Friday, based on preliminary data from the authority. Economists expect the weakness to continue for the time being. Hopes of a strong economic recovery this year have faded.

"In the first quarter, German economic output fell again slightly," said Bundesbank President Joachim Nagel. If GDP shrinks for two quarters in a row, economists speak of a technical recession. This does not mean that the year as a whole is negative. However, Germany had already slipped into a recession in 2023 with an overall decline in economic output of 0.3%.

Some economists do not rule out a further decline in 2024 as a whole. The German government only expects a mini growth of 0.2 percent. "We are emerging from the crisis more slowly than we had hoped," said Economics Minister Robert Habeck recently.

"A little more light than shadow"

According to Bundesbank President Nagel, however, the outlook for 2024 promises "a little more light than shadow". The economy should regain its footing over the course of the year. Demand from abroad should provide a tailwind. Private consumption should also benefit from the improvement in purchasing power. "Thanks to a stable labor market, sharply rising wages and falling inflation, people will effectively have more money in their pockets." According to his assessment, the business location is still well positioned in a global comparison despite structural problems. "Germany is not the sick man of the global economy".

At the end of the year, private consumer spending rose by 0.2 percent. Inflation had weakened recently, which may boost people's desire to consume. By contrast, there were signs of a slowdown in investment. Investments in buildings fell compared to the previous quarter. Construction is suffering from higher interest rates and costs. Companies also invested less in equipment such as vehicles and machinery. One reason may have been the expiry of the requirement for electric cars, explained economists at Deutsche Bank subsidiary DWS.

The mood among companies has recently brightened slightly. The Ifo business climate rose in February. "The economy is stabilizing at a low level," said Ifo President Clemens Fuest.

Government deficit is getting smaller

There was a ray of hope in government finances. Last year, the treasury once again spent more money than it took in. However, the deficit of the federal government, federal states, municipalities and social security funds decreased by 9.5 billion euros to 87.4 billion euros compared to the previous year, partly because a large part of the expenditure to combat the pandemic was eliminated.

The federal government recorded the largest shortfall at 79 billion euros. Declining transfers from the federal government and the continuing financial burden of providing for refugees contributed to the fact that the federal states (6.4 billion euros) and municipalities (12.1 billion euros) also recorded financing deficits. In contrast, social security funds (10 billion euros) recorded a slight increase in surpluses.

In relation to total economic output, the deficit amounted to 2.1 percent. The Federal Office had initially assumed 2 percent. In 2022 it was 2.5 percent. Due to the budget ruling by the Federal Constitutional Court, the federal government is nevertheless forced to make savings.

After two outliers in the coronavirus years of 2020 and 2021, Germany thus complied with the European debt rule for the second year in a row, which allows EU countries to run a budget deficit of no more than three percent. The rules had been suspended due to the coronavirus aid programs. Representatives of the European Parliament and the governments of the EU member states recently agreed on a reform. The plans provide for EU targets for reducing excessive deficits and debt to take greater account of the individual situation of countries./mar/DP/jkr