Europe's Growth Engine Has Sputtered --- Germany's economy shrank in 2023 and new challenges point to more pain ahead

"Germany is stuck in a rut, and there is no quick way out.

The European powerhouse's economy, the largest on the Continent and the world's fourth-biggest, shrank last year, extending a six-year slump that is raising fears of deindustrialization and sapping support for governments across the region.

Output in the country likely shrank by 0.3% in the three months through December from the previous quarter, the German federal statistics agency said Monday. For 2023 as a whole, it contracted by 0.3%, leaving it only 0.7% larger than in 2019, before the Covid-19 pandemic, the agency said. Other large eurozone economies likely grew last year, including France, Italy and Spain, according to European Union estimates.

The downturn reflects a confluence of headwinds that are upending the country's export-focused business model, from slower growth in China to higher energy prices and interest rates, mounting tensions around global trade, and a tricky transition to green energy. And with no sign that any of these cyclical and structural factors are about to improve, Germany's prospects aren't looking good.

"I've never been so worried about the medium-term outlook for Germany," said Dirk Schumacher, an economist with Natixis in Frankfurt who has been tracking the German economy for decades.

The country's gross domestic product is only 1% larger than it was at the end of 2017 after adjusting for inflation. By contrast, the U.S. economy has grown by an inflation-adjusted 13% over the same period, according to data from Eurostat and the Bureau of Economic Analysis.

This year, Germany faces new economic threats, from a collapsing real-estate market to conflict in the Middle East that is disrupting the Asia-Europe trade route. Despite an uptick in unemployment and record immigration, businesses complain of labor shortages. The government's spending plans have been thrown into disarray by a constitutional court ruling limiting the use of off-budget funds.

The malaise is feeding broader resentment. Farmers blockaded roads in Berlin on Monday to protest subsidy cuts. Polls suggest that the far-right Alternative for Germany could emerge as Germany's biggest political force in European Parliament elections in June and at state elections later this year.

All that is reviving the "sick man of Europe" label that was attached to the country in the late 1990s and early 2000s as it lost competitiveness in the aftermath of reunification between East and West Germany.

Germany's storied auto industry is struggling with competition from Tesla and upstart Chinese rivals, which are ramping up electric-vehicle sales in Europe. Car production in Germany is more than 25% below its mid-2010s level, according to the German Association of the Automotive Industry, a lobby group. German manufacturing output as a whole is smaller than in 2019 and shrinking, according to the Organization for Economic Cooperation and Development, a club of mainly rich countries.

Now, the conflict in the Red Sea is disrupting shipping and raising the specter of a new supply-chain crisis for European manufacturers. Tesla on Friday said it would stop nearly all production at its biggest factory in Europe, just outside Berlin, from Jan. 29 to Feb. 12 because of a lack of components.

Some economists are sanguine, pointing to Germany's still-low unemployment rate and low government debt.

Germany might already have adjusted to higher energy costs and slower growth in China and could receive a disproportionate boost when global trade recovers, said Holger Schmieding, chief economist at Berenberg Bank.

Still, a recent German Chamber of Industry and Commerce poll asking more than 2,200 German industrial companies to assess business conditions posted its worst result since the survey started in 2008.

Bank of America last week cut its growth forecasts for Germany and the eurozone and now expects Germany's economy to shrink by 0.1% this year, having previously forecast growth of 0.3%.

The pains aren't contained to the economy. Only 19% of voters are satisfied with Chancellor Olaf Scholz -- the lowest figure for any chancellor since 1997 -- according to an Infratest dimap poll for the ARD public-sector broadcaster published this month. Gripes range from the government's decision to speed up its green transition agenda to its failure to curb a sharp rise in illegal immigration.

Ratings for Scholz's coalition partners have also collapsed. This month, members of the pro-business FDP, the smallest party in the ruling alliance, forced a ballot about whether it should exit the government, with a slim majority of 52% deciding it should remain.

"The wind is blowing in our faces," said Ralph Wiechers, chief economist at the German Mechanical Engineering Industry Association.

"We are living on order backlogs and they are disappearing," Wiechers said. "We haven't hit the bottom."" [1]

1. World News: Europe's Growth Engine Has Sputtered --- Germany's economy shrank in 2023 and new challenges point to more pain ahead. Fairless, Tom.  Wall Street Journal, Eastern edition; New York, N.Y.. 16 Jan 2024: A.18.