Germany braces for its longest recession ever as economy contracts again

Germany is navigating a profound economic crisis, as the Handelsblatt Research Institute forecasts a third consecutive year of contraction in 2025, defining it as the longest recession the country has faced since World War II. Contributing factors to this downturn include the ongoing energy crisis, rising inflation, and the effects of the Covid-19 pandemic. Since the beginning of the conflict in Ukraine, Germany's dependence on Russian gas, which accounted for over half of its energy needs, has drastically shifted following EU-imposed sanctions. The destruction of the Nord Stream pipelines in September 2022 exacerbated these energy challenges. In transitioning away from Russian gas, Germany has encountered inflated energy costs linked to new imports of liquefied natural gas from the United States. This spike in energy pricing has severely impacted German manufacturers and small enterprises, leading to a wave of shutdowns and bankruptcies that have rocked various industries, including high-profile companies like Volkswagen. Former Chancellor Angela Merkel has openly criticized the move away from Russian energy sources, indicating the complexity of the decisions made in response to geopolitical events. The onset of demographic challenges, particularly an aging population, further complicates the economic picture for Germany. The HRI has determined that Germany's annual growth potential has diminished significantly to approximately 0.5%. As the German economy struggles, there is a modest expectation for a slow recovery in 2026 with an anticipated growth rate of just 0.9%, falling short of pre-crisis levels. This continued economic distress is marked by widespread concern about the viability of recovery and sustainability amidst such transformative shifts in energy policy and market dynamics. Germany’s export sector, specifically its high-value manufacturing capabilities, remains a pocket of strength, albeit it is not immune to the cloud of high energy prices and global uncertainties looming over the economy. As of January 4, 2025, official data from the Federal Statistical Office is awaited, likely confirming contraction in 2024 while the implications of these economic changes unfold leading towards the early general election scheduled for February 23, 2025, forced by the collapse of Chancellor Olaf Scholz’s coalition government in November 2024.