Germany was expected to be the only major European economy to get a deal

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A metal worker grinds metal peace pictured in a forge in Klitten, Germany. Manufacturing activity has been difficult this year.

Florian Gaertner | Picture | Getty Images

Germany is poised for recession this year – the only major European economy to experience a recession in 2023, according to new forecasts from the European Commission, the EU’s executive arm.

Europe’s largest economy is expected to post a 0.4% fall in economic activity this year – that’s 0.6 percentage points lower than an estimate made in May, according to the commission, which released new forecasts on Monday. The institution also cut the growth expectations for Germany in 2024, from 1.4% to 1.1%.

Germany’s economy has been struggling since Russia’s invasion of Ukraine, with Berlin forced to quickly end years of energy dependence on the Kremlin. The International Monetary Fund said in July that Germany would likely contract by 0.3% this year.

Leading economists have dubbed the traditional economic powerhouse the “sick man of Europe.” The concept was coined back in 1998 when Germany was facing major economic challenges. But it is being resurfaced as Berlin records a sharp decline in output.

Data released in early September showed that manufacturing activity in the country fell at the strongest pace since June 2009, excluding the period of the Covid-19 pandemic.

Other economists, however, agree that Germany’s current problems can be compared to past recessions.

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“The situation in Germany today is very different from the problems of 1995-2004. First, Germany enjoys higher earnings, a high demand for labor and the most comfortable fiscal position of all the major advanced economies . That makes it much easier to adjust to shocks,” Holger Schmieding, chief economist at Berenberg, in a note in August.

Overall slowdown in Europe

The latest economic forecasts point to a general slowdown across the region. The EU 27 economies are now expected to grow at an average pace of 0.8% this year. This is down from the 1% estimate made in May.

Going into next year, the picture is also worse than previously thought. The EU is expected to grow 1.4% rather than the May estimate of 1.7%.

“Weakness in domestic demand, particularly consumption, shows that high and still rising consumer prices for most goods and services are taking a heavier toll than expected,” said the European Commission in a statement on Monday.

High inflation remains one of the main challenges in the bloc. The latest forecasts show that consumer prices will ease in the coming months, but are likely to remain above the European Central Bank’s target of 2% by the end of 2024.

Headline inflation in the euro area, where 20 EU countries share the same currency, is seen at 5.6% in 2023 and then at 2.9% by the end of 2024.

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“Inflation in services has so far been more resilient than previously expected, but is expected to continue to ease as demand eases under the influence of monetary policy tightening and a post- COVID,” the commission said.

He warned that price pressures could drag on further. The ECB is expected to meet on Thursday and announce whether they are raising interest rates again. The central bank, from July 2022, has increased rates by 4.25 percentage points in an attempt to bring down historically high inflation in the region.

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