February 29, 2024 (MLN): The German economy’s weak performance has given rise to commentary that the country’s economic model is “broken” or that GDP growth is stuck in a very low range. However, Fitch Ratings believes the country is operating below potential, with space for catch-up.
Germany’s post-Covid-19 pandemic economic performance was weak, after a decade of relatively strong growth in 2010-2019. Output in 4Q23 was barely higher than in 4Q19, the worst of any of 20 major economies tracked by Fitch Economics.
Fitch had expected underperformance in 2022 and 2023, which reflected a combination of negative shocks – the gas supply and price shock that affected Europe in 2022, ECB monetary tightening, and a rare downturn in global trade volumes combined with weakness in the Chinese economy.
As these shocks fade, there should be scope for some catch-up.
Fitch estimates that by end-2024, Germany will have the widest negative output gap among the 10 developed economies (DM10) tracked by Fitch’s Economics Team, at around 2pp.
Unless Germany has lost much more potential output than we think, or convergence to potential output is long delayed, German growth is due for a recovery in 2024-2027, although this will start very slowly in 2024.
Structural constraints are also evident. Fitch lowered our estimate of Germany’s medium-term potential growth rate in 2023 to 1.1%, one of the lowest in the DM10, with a slow-growing labor force the biggest constraint. The energy shock reduced potential output by 1pp of GDP.
One vulnerability of the German economic model is the dependence on foreign demand for an outsize share of its growth, evident in a structural current account surplus.
Greater domestic investment, absorbing more savings domestically, would both reduce reliance on global demand and increase productivity.
