In 2024, the German economy contracted for the second consecutive year, with GDP falling by 0.2%, mainly due to the weakness of manufacturing and construction industries, as well as increased pressure from high interest rates and energy costs. The service industry recorded growth, but it was not enough to reverse the overall weak trend. If reforms are not implemented in the future, manufacturing outflows and productivity declines will exacerbate economic challenges. The rebound space of EUR/USD is limited, and the strengthening of the US dollar continues to suppress it. The market is paying attention to the fourth quarter GDP data and economic policy reform dynamics.

Economic performance: Shrinking for the second consecutive year

According to data released by the German statistical agency Destatis, the German economy will shrink by 0.2% in 2024, marking the second consecutive year of decline in the country's economy. In 2023, GDP has decreased by 0.3%. This result is in line with the expectations of economists surveyed by Reuters, and the European Commission and leading economic research institutions in Germany also predict a 0.1% decline in GDP. The Director General of the German Statistical Office, Ruth Brand, stated that economic growth is constrained by "cyclical and structural pressures," including intensified competition in export markets, high energy costs, high interest rates, and uncertain economic prospects.

Industry performance: Weakness in manufacturing and construction industries

From the perspective of industry performance, the manufacturing and construction industries showed weakness in 2024, while the service industry recorded growth. Germany has long faced a housing construction crisis, mainly due to high interest rates and rising construction costs. In addition, the German automotive industry is also under pressure, not only facing the challenge of transitioning to electric vehicles, but also being impacted by competitors.

Fourth quarter GDP decline

Preliminary data from Destatis shows that the German economy declined by 0.1% month on month in the fourth quarter of 2024. This indicates that the German economy lost momentum at the beginning of the winter, and political uncertainty may be an important factor. Deutsche Bank's Chief German Economist Robin Winkler said that if this data is ultimately confirmed, it will mean that the German economy is once again in a state of stagnation.

Future outlook: The necessity of reform

The German Economic Research Institute Ifo warns that without economic policy reforms, the German economy will continue to stagnate in 2025, with an expected GDP growth of only 0.4%. Ifo pointed out that without countermeasures, manufacturing companies may continue to shift production and investment overseas, productivity growth will stagnate, and low productivity growth in the service industry will replace high productivity manufacturing, further weakening the long-term competitiveness of the German economy.

However, if appropriate reform measures are implemented, such as improving the investment environment and enhancing employment attractiveness, the German economy may achieve a growth rate of 1%. Ifo calls on the government to take action to prevent sustained economic weakness.

DAX index performs positively

Despite poor economic data performance, the German stock market DAX index rose 0.47% after the data was released. Analysis suggests that this may be due to the market's previous expectation of GDP contraction, and the recent overall upward trend in the stock market has offset some negative emotions.

Long term trends and risk factors

In the long run, analysts believe that the weak performance of the German economy may continue to put pressure on the euro, especially given the relatively strong performance of the US economy. In addition, if Germany fails to take timely economic reform measures, the trend of manufacturing outflow and productivity decline may further exacerbate the depreciation pressure of the euro.

conclusion

The German economy will shrink for the second consecutive year in 2024, with weak performance in the manufacturing and construction industries being the main drag factors. Although the growth of the service industry has provided some support, the overall economic environment still faces structural challenges such as high interest rates and high energy costs.

The rebound space of the euro against the US dollar is limited, and the strong performance of the US dollar may continue to suppress the euro. The market is paying attention to the official release of Germany's fourth quarter GDP data and the economic reform measures that the German government may take to evaluate future market trends.