Germany’s Economy in a Crisis
Germany’s economy, once a growth engine for Europe, is currently in a precarious situation. The country’s gross domestic product (GDP) shrank by 0.2 percent in the fourth quarter of 2024, a steeper decline than the 0.1 percent predicted. This means that Germany’s economy will contract by 0.2 percent for the year 2024, following a 0.3 percent decline in 2023. This marks the first time since 2002 and 2003 that Germany has experienced a two-year recession.
The consequences of this development are far-reaching for the entire Eurozone. The Eurozone’s economy stagnated at the end of 2024, with Germany and France, the two largest economies, struggling with negative growth rates. While Germany’s economy shrank by 0.2 percent, France’s economy contracted by 0.1 percent. Italy remained stagnant, while Spain showed a positive contrast with a growth rate of 0.8 percent.
The reasons for Germany’s economic weakness are multifaceted. The industry is suffering from rising energy costs, while structural problems, such as a shortage of skilled workers and high tax rates, continue to hinder growth. Additionally, the negative effects of global trade conflicts and geopolitical tensions are affecting exports, a traditional strength of the German economy.
In response to these challenges, the German Industry Association (BDI) has revised its forecast for 2025, expecting a further decline in economic output of 0.1 percent. If this prediction comes to pass, Germany would experience the longest period of economic stagnation in the history of the Federal Republic.
The European Central Bank (ECB) reacted to the weak economic data with a 0.25 percentage point cut in interest rates to 2.75 percent, the fifth reduction since June 2024. ECB President Christine Lagarde emphasized that the current monetary policy measures remain restrictive, but further rate cuts could be possible to boost growth.
The current situation highlights the urgent need for structural reforms in Germany. Experts are calling for measures such as a reduction of bureaucracy, investments in education and infrastructure and initiatives to promote innovation and digitalization. Only through decisive action can Germany regain its role as a economic anchor for Europe and make a positive contribution to the stability of the Eurozone.
In the United States, the economy is not currently in a recession, but there are signs of economic uncertainty that could indicate a worsening of the situation in the near future. In the past, many economists were convinced that a recession was imminent, but now almost no one expects one. However, could they be wrong again?
Despite the economic turbulence in recent years, including the collapse of several banks in 2023, the US economy has so far not officially entered a recession. The definition of a recession is typically two consecutive quarters of shrinking economic output. This criterion was met in the first half of 2022, when the GDP shrank by 1.6 percent in the first quarter and by 0.6 percent in the second quarter, but the phase was considered a “mild” economic slowdown.
According to the Bureau of Economic Analysis, the economy grew by 1.3 percent in the first quarter of 2024, indicating a continued expansion.
The role of the US Federal Reserve
The Federal Reserve has actively tried to control inflation and stabilize the economy through interest rate hikes and cuts. Interest rates have developed as follows:
2022: Seven interest rate hikes of 0.25 percentage points from 0.25 to 4.25-4.50 percent
2023: Four more interest rate hikes, ending the year at 5.25-5.50 percent
2024: Interest rate hikes paused, first cuts in September
2025: Pause of interest rates in January, current range: 4.25-4.50 percent
How long does a recession last?
According to the National Bureau of Economic Research, the duration of recessions can vary between two months and several years. The current economic situation, however, is unique and difficult to compare with past cycles.
Although the unemployment rate remains low, there are reports of layoffs and cost-cutting measures in companies. Geopolitical crises, such as the wars in the Middle East and Ukraine, could also continue to pose uncertainty for the economy.
As economic cycles are unpredictable, it is wise to prepare for various scenarios financially.