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Germany Faces Prolonged Recession in 2023, European Commission Forecasts

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Germany Predicted to Experience Prolonged Recession

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According to the European Commission, Germany is expected to be the only major European economy to experience an economic contraction in 2023. The commission’s fresh forecasts predict a 0.4% fall in economic activity for Germany this year, which is lower than the previous estimate made in May. Additionally, the growth expectations for Germany in 2024 have been reduced from 1.4% to 1.1%.

The German economy has faced challenges due to Russia’s invasion of Ukraine, which led Berlin to quickly end its energy dependency on the Kremlin. In July, the International Monetary Fund projected a 0.3% contraction for Germany this year.

Some economists have referred to Germany as the “sick man of Europe,” a term originally coined in 1998 during a previous economic downturn. Recent declines in output have revived this label. Manufacturing activity in the country experienced its strongest decline since June 2009, excluding the period affected by the Covid-19 pandemic.

However, other economists argue that Germany’s current situation is different from previous downturns. Record employment, high labor demand, and a strong fiscal position make it easier for Germany to adapt to shocks, according to Holger Schmieding, the chief economist at Berenberg.

Overall Slowdown in Europe

The latest economic forecasts indicate a general slowdown across the European region. The 27 EU economies are now expected to grow at an average pace of 0.8% this year, down from the 1% estimate made in May. The forecast for next year is also less optimistic, with the EU projected to grow by 1.4% instead of the previously estimated 1.7%.

The European Commission stated that weakness in domestic demand, particularly in consumption, is primarily due to high and increasing consumer prices for goods and services. The bloc continues to face the challenge of high inflation, with consumer prices expected to remain above the European Central Bank’s target of 2% by the end of 2024. Inflation in the euro area is predicted to be 5.6% in 2023, gradually decreasing to 2.9% by the end of 2024.

The commission believes that inflation in services has been more persistent than expected; however, it is expected to moderate as demand softens due to monetary policy tightening and the fading post-COVID boost. The ECB is set to announce whether it will raise interest rates again in its upcoming meeting, as it has already increased rates by 4.25 percentage points since July 2022 in an effort to combat historically-high inflation in the region.

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