German economy shrinks 0.3%, costly energy, higher interest rates to blame

Germany's economy shrank 0.3 per cent last year as Europe's former powerhouse struggled with more expensive energy, higher interest rates, lack of skilled labour and a homegrown budget crisis.

Europe's largest economy has been mired in stagnation since the last months of 2022 amid those multiple challenges. The International Monetary Fund expected Germany to be the worst-performing major developed economy last year, a major turnaround from its place as a model for how to expand when other nations were struggling.

German's economy likely also shrank 0.3 per cent in the fourth quarter after stagnating in the third quarter, the Federal Statistical Office said on Monday in an initial rough estimate. Official figures for the last three months of 2023 are expected to be announced January 30.

Meanwhile, there's an ongoing debate about why Germany has stalled. Energy intensive industries must pay higher natural gas prices after losing Russia's cheap supply following its invasion of Ukraine, and a burst of inflation deterred consumers from spending.

Meanwhile, companies complain they can't fill highly skilled jobs, and a global slowdown in manufacturing has been felt in the country's large factory sector.

Higher interest rates from the European Central Bank aimed at quelling inflation have crimped construction of new apartments and offices.

The government also faced a budget crisis after Germany's constitutional court ruled that tens of billions of euros (dollars) originally meant to cushion the fallout from the COVID-19 pandemic could not be repurposed for measures to help combat climate change and modernize the country. The 2023 and 2024 budgets had to be reworked.

Others point to a long-term lack of investment in infrastructure such as rail networks and high-speed internet as the government focused on balancing the budget under a 2009 constitutional amendment limiting deficit spending.