German GDP downgraded in new blow for struggling economy

German third-quarter growth was downgraded Friday with official data showing it expanded even more weakly than previously thought, in a new blow for Europe's top economy as it battles multiple headwinds.

The final reading of 0.1 percent growth confirmed the eurozone's traditional growth engine had narrowly dodged a technical recession, following a contraction in the previous quarter.

But it was down from a preliminary figure of 0.2 percent growth quarter-on-quarter, representing more bad news as the economy struggles with challenges from a slowdown in its crucial manufacturing sector to weak demand for key exports.

The downgrade went against predictions from analysts surveyed by financial data firm FactSet, who had expected no change.

"The data once again emphasises the extent of the current crisis in Germany," said LBBW bank analyst Jens-Oliver Niklasch. "Economic output in Germany is treading water -- at best."

ING economist Carsten Brzeski warned that, while a summer recession had been avoided, a sharp downturn in the winter may be coming.

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The economy was hit in the third quarter by a 1.9-percent fall in exports compared to the previous quarter, as well as weaker investments in areas such as machinery, equipment and construction, according to statistics agency Destatis.

Consumption, however, rose by 0.3 percent quarter-on-quarter, providing vital support, according to Destatis.

The growth data laid bare how far Germany is lagging behind other major economies.

Destatis noted that Germany's economic growth was behind that of the European Union as a whole in the third quarter, with Spain, Italy and France all notching up better performances.

And it was even further behind when compared to the United States, which has put in a robust performance in recent times, the agency noted.

Political uncertainty

The German economy was hit hard after food and energy costs surged in the wake of Russia's invasion of Ukraine in 2022, and amid post-pandemic supply chain woes.

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Germany was the only major advanced economy to shrink in 2023 and the government has previously said it expects another mild contraction in 2024, before a recovery begins the following year.

But while inflation has eased from highs, a strong rebound has failed to materialise amid weak demand from key trading partners, particularly China.

The crisis has been illustrated by a string of poor results from Germany's corporate titans, from carmakers like Volkswagen -- which is threatening to shut factories in Germany for the first time -- to those in the chemicals and pharmaceutical sectors.

Long-standing structural challenges have deepened Germany's woes, including complex bureaucracy, under-investment in infrastructure, an ageing workforce and a costly green energy transition.

Political uncertainty at home and abroad is adding to the challenges.

Germany is headed for elections in February, seven months earlier than initially scheduled, after the collapse of Chancellor Olaf Scholz's three-party coalition earlier this month.

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Meanwhile Donald Trump's US presidential election victory presents a headache for German businesses, as the United States is a major destination for "made in Germany" goods.

Joachim Nagel, head of the German central bank, warned last week that if Trump pushes ahead with his pledge to impose tariffs on all imports, it could knock one percent off German output.

ING's Brzeski warned about the impact of Trump's looming return as president.

"Whether it's the prospects of tariffs or US tax cuts and deregulation indirectly undermining German competitiveness, it's hard to see how US economic policies will not be negative for the German economy," he said.

Source: AFP