The German economy is on shaky ground, and there are few signs of hope

There was little good news for the German economy. The latest economic data has done little to change this situation.

Some key data points for 2023 – factory orders, exports and industrial production – were released last week and signaled a weak end to the year that has seen questions emerge about Germany being the “sick man of Europe”.

“The data confirm that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.

Industrial production fell by 1.6% in December on a monthly basis, and fell by 1.5% in 2023 overall compared to the previous year. Exports – a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), over the year.

Meanwhile, factory orders data looked promising at first glance, reflecting an 8.9% increase in December compared to November.

But Franziska Palmas, chief European economist at Capital Economics, told CNBC that this growth is “not a big reason for relief,” explaining that this is due to many large-scale orders, which tend to be volatile. She added: “Orders excluding large-scale orders actually fell to their lowest levels after the pandemic.”

For 2023 overall compared to the previous year, factory orders decreased by 5.9%.

While this “challenging” data from December does not yet indicate that a recovery is on the horizon, the latest PMI report suggests that the worst may soon be over in the manufacturing sector, Schmieding said.

He pointed out, “Although the level of 45.5 is still below the fifty-fifty line that separates growth from contraction, it has risen to its highest level in 11 months.”

However, economic growth is unlikely to be imminent, Erik Jan van Haren, global economics and markets strategist at Rabobank, told CNBC.

“We are still far from the kind of activity in German industry that we saw before the pandemic,” he explained. “We still expect a modest contraction in the first quarter, but it will likely be less severe than in the 24th quarter,” Van Haren said. After that, he expects growth to rebound slightly, but sees full-year growth as flat.

There are others who are more pessimistic about the German economy.

“We are sticking to our forecast that the German economy will contract by 0.3% in 2024 as a whole,” Jörg Cramer, chief economist at Commerzbank, told CNBC.

This is broadly in line with the German economy's performance in 2023, when it contracted by 0.3% year-on-year, according to data released by the Federal Statistics Office last month. The data also showed a 0.3% decline in GDP in the fourth quarter, but Germany managed to avoid a technical recession characterized by two consecutive quarters of negative growth.

This is due to the Census Bureau finding that the third quarter of 2023 saw a recession rather than a contraction. But if the economy contracts as expected in the first three months of 2024, Germany will actually slide into recession.

Addressing the causes of the economic downturn, Cramer explained, “Businesses simply have a lot to absorb – rising global interest rates, rising energy prices, less tailwinds from China, and the erosion of Germany as a trading location.”

Some of these headwinds may also play a major role when it comes to weakening export numbers, Rabobank's Van Haren noted. Factors such as cheap energy from Russia, strong demand from China, and rising global trade have boosted Germany's exports for decades, “but they are now faltering,” he added.

Experts say that looking beyond purely economic, national and international policies may also pose a risk to the country's economy.

Germany's coalition government has come under pressure after going through a budget crisis following a Constitutional Court ruling that reallocating unused debt taken up during the pandemic to existing budget plans is illegal.

This has left a €60 billion gap in the coalition's budget plans, and with money set aside for years to come, the crisis is likely to rear its head again at the end of the year when planning for the 2025 budget begins.

Voter satisfaction with the government is also low, with the opposition Christian Democratic Union party currently leading in opinion polls and followed in second place by Germany's far-right party, the Alternative for Germany (AfD). But support for the latter has declined in recent weeks amid anti-far-right protests sweeping the country, with hundreds of thousands of Germans taking to the streets.

Elsewhere, Schmieding suggested that the US election could make things more difficult as well.

“Trade war threats from Trump could be very negative for Germany,” he said, “but this of course depends on the outcome of the elections, and they may not appear in full force until 2025.”