Germany's economy contracts for second year in 2024: Is India following the same trajectory?

Germany’s economy contracted for the second year in a row in 2024, as cautious consumers held back spending and fierce competition from China eroded the country’s traditional dominance in exporting cars and industrial machinery.

This continued economic slump highlights Germany’s struggles, positioning it as Europe’s weakest major economy. The nation has seen little to no growth over the past four years, grappling with global shifts that have heavily impacted its economic structure.

Preliminary official data released Wednesday showed that Gross Domestic Product (GDP) shrank by 0.2% in 2024, following a 0.3% decline in 2023. With an election scheduled in February where the economy is a central issue, the figures underscore the country's lack of significant recovery. In fact, Germany’s economy is only 0.3% larger than it was in 2019, the year before the pandemic.

Business in Germany has been battered by a mix of external pressures and internal challenges. This has sparked a national debate over how to revive the economy, and political instability has compounded matters. Chancellor Olaf Scholz’s three-party coalition government fell apart in November following a dispute with his finance minister about how to tackle the economic downturn. The dissolution of the government has paved the way for an early election on February 23, 2025.

Candidates in the upcoming election have laid out differing plans on how to address the economic stagnation and reinvigorate the country. Some proposals focus on government intervention and incentives to encourage growth, while others emphasize reforming bureaucracy and investing in innovation.

Ruth Brand, head of Germany’s statistics office, pointed to a combination of short-term and long-term factors that have contributed to the country’s economic woes. These include soaring energy prices following the loss of cheap Russian natural gas, high interest rates from the European Central Bank that deter investment, and consumers’ growing fear about the future, which has led them to save rather than spend.

Expenditures on services like restaurants and hotels fell by 4.4%, while spending on clothing and shoes dropped by 2.8%, despite a rise in disposable income. On the export front, Germany faces increasing competition from China, which has made significant inroads into markets traditionally dominated by German industries such as automobiles, machinery, and chemicals.

In addition, Germany is grappling with more structural issues, including excessive red tape and a shortage of skilled labor, further hampering economic growth. While global trade increased in 2024, German exports shrank due to intensified competition from China.

“The German economy is stuck in stagnation,” said Nils Jannsen of the Kiel Institute for the World Economy. He described the outlook for 2025 as “gloomy,” with the potential threat of new U.S. trade policies, such as higher tariffs under the incoming Trump administration, adding to the uncertainty facing the export-heavy economy.

Despite weak growth, the labor market remains resilient, with unemployment low and disposable income rising due to pay increases aimed at offsetting inflation. However, the public’s willingness to spend is constrained by concerns about job security, as major companies like Volkswagen, Thyssenkrupp, and Bosch have announced layoffs. In addition, the ongoing war in Ukraine has further clouded economic prospects.

The economy is believed to have contracted by 0.1% in the fourth quarter of 2024, according to initial estimates, although December data has not yet been finalized.

India - The Present State of the Indian Market

While Germany’s economy struggles with stagnation, the Indian market is currently exhibiting a different trajectory. India is experiencing a steady economic growth rate, with the country benefiting from a large and youthful workforce, rapid digitization, and increasing foreign investments. India’s robust service sector, in particular, has been a key driver of growth, along with an expanding manufacturing base that has been boosted by government initiatives like the “Make in India” campaign. Additionally, the tech sector, including healthtech, has seen significant advancements, with Indian startups leading the charge in developing innovative solutions for both local and global markets.

With global shifts affecting markets worldwide, India has the potential to be a rising economic powerhouse, offering opportunities for businesses looking for stability and growth in emerging markets. As Germany navigates economic challenges, India remains a favorable destination for investment and business expansion, making it an important player on the global economic stage.