The figures from the Federal Statistical Office on Monday revealed that Germany's gross domestic product (GDP) contracted by 0.3% in 2023, signaling a persistent recession in Europe's largest economy.

The German economy shrunk by 0.3% over the full year 2023 due to persistent inflation, high energy prices and weak foreign demand.

"Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises," said Ruth Brand, president of the statistics office, on Monday in Berlin.

The full-year decrease in GDP was in line with the forecast by analysts polled by Reuters.

Consumer spending has declined in the face of persistent inflation, while the country's exporters, including China, have seen sluggish global demand for exports.

"Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth," Brand said. "Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll."

According to preliminary data, the average inflation rate for the year was 5.9% – the second-highest figure since Germany reunified in 1990. The highest figure was posted in 2022, with an inflation rate of 6.9%.

"The recessionary conditions which have been dragging on since the end of 2022 look set to continue this year," said Andrew Kenningham, chief Europe economist at Capital Economics.

The recent fall in inflation should provide some relief for households, but residential and business investment are likely to contract, construction is heading for a steep downturn and the government is tightening fiscal policy sharply, Kenningham said, forecasting zero GDP growth in 2024.

The German economy did not continue its recovery from the sharp economic slump experienced in the pandemic year of 2020, but GDP was 0.7% higher in 2023 than in 2019, the year before the COVID-19 pandemic hit.

"It is worrying that the German economy has hardly grown at all since the outbreak of COVID-19," Commerzbank's chief economist Joerg Kraemer said. "This is rare and brings back memories of the years following the bursting of the stock market bubble at the start of the millennium."

Economic performance in industry, excluding construction, declined by 2.0% in 2023 due to much lower production in the energy supply sector, while economic activity in services contributed to growth.

Construction saw a modest growth of 0.2% in 2023. Deteriorating financing conditions had a particularly noticeable impact in the sector, alongside persistently high building costs and a skilled labor shortage.

Household consumption in 2023 was down a price-adjusted 0.8% on the previous year and government expenditure fell 1.7%, the data showed.

The subdued pace of growth of the global economy and weak domestic demand in 2023 also impacted foreign trade, which declined despite falling prices, with imports experiencing a 3.0% contraction and exports falling 1.8% on the year. This produced a positive balance of exports and imports, which supported GDP.

A weak end of year

In the final quarter of last year, the German economy shrank by 0.3% compared with the previous quarter.

The euro zone's largest economy stagnated in the third quarter compared with the previous three months, following the upward revision of the statistics office.

With the stagnation in the third quarter, the German economy skirted a recession, which is commonly defined as two successive quarters of contraction.

"Some take comfort in the fact that the economy is 'only' stuck in stagnation and has avoided a more severe recession. But this should be no reason for any complacency," said Carsten Brzeski, global head of macro at ING.

Looking ahead, at least in the first months of 2024, the economist said many of the recent drags on growth will still be around and will, in some cases, have an even stronger impact than in 2023.

"The risk that 2024 will be another year of recession is high," Brzeski said.