Germany, Europe’s largest economy, has entered a technical recession, and economists predict that GDP growth will be stagnant for the rest of the year. This has raised concerns about the country’s economic outlook. In addition to the recession, several other factors indicate that the German economy is struggling. Here are five charts that illustrate the current state of the German economy.
1. High Inflation: Germany’s inflation rate is expected to reach 6.4% for June, which is an increase from the 6.1% recorded in May. Although the projected increase is lower than the near-50-year high of 8.8% in October, it remains well above the country’s 2% target. The central bank estimates that inflation won’t reach 2% until at least 2025, which means that households will continue to face financial pressure.
2. Interest Rates: Germany’s place in the euro zone means that its interest rates are determined by the European Central Bank (ECB). While the government can’t control inflation, it can mitigate its impact on the population by introducing relief packages. The ECB has been consistently raising rates since July 2022 to tackle inflation, and the main rate currently stands at 3.5% after a recent hike on June 15.
3. Energy Prices: High global energy prices, influenced by pent-up pandemic demand and geopolitical events like Russia’s invasion of Ukraine, have contributed to the current bout of inflation. Some energy sources are starting to settle at pre-war prices, but the energy crisis continues to affect key industries in Germany. The cost of utilities is expected to increase in 2023, with electricity bills predicted to rise by around 35% and industrial power prices by around 75%.
4. Export Figures: German exports unexpectedly decreased in May, dropping by 0.1% compared to April. Analysts had anticipated a 0.3% increase. The decline may be attributed to factors such as the recent lower energy costs, which affect export prices. However, the terms of trade are improving, and the German economy has already recouped half of the losses incurred due to the energy crisis and changes in foreign trade.
5. Aging Population: Germany has the largest aging population in Europe, with a growing number of retirees. By the middle of the 2030s, the number of people at retirement age is projected to increase by approximately 4 million, reaching at least 20 million retirees. This aging population raises concerns about the sustainability of the country’s pension system. Contributions to public pension plans are expected to reach 12.2% of GDP by 2070, one of the highest forecasted changes in the European Economic Area. The labor shortage crisis has prompted Germany to revise its immigration rules to attract more workers and embrace digitalization to maximize productivity.
The combination of a technical recession, high inflation, interest rate hikes, energy crisis, challenges in the export sector, and an aging population poses significant challenges to Germany’s economy. Efforts to address these issues will be crucial for its future economic growth and stability.