What are the reasons for German economy contract in 2023?

The German government statistics office announced on Monday that the German economy contracted by 0.3% during the last quarter of last year, which placed the largest economy in Europe among the worst performers over the past year compared to other G7 countries.

The German economy escaped recession in 2023 only thanks to an upward review during the third quarter of the year, after it was on the verge of contraction during the first and second quarters.

The International Monetary Fund expected that the first economic power in Europe would become the only one to witness a contraction process within the economies of the major Group of Seven (G7) countries during 2023.

“Germany’s overall economic development stalled in 2023 in an environment still characterized by crises,” Ruth Brand, chief statistician, said in a press conference on Monday.

Berlin, which relies heavily on exports and energy imports from Russia, has been particularly hard hit by the collapse of supply chains, falling global demand, and rising energy prices over the past three years.

The massive rise in inflation and interest rates has also made matters worse.

German Chancellor Olaf Scholz’s government tried to confront the economic situation by adopting austerity measures, which entailed government cuts and tax increases, which raised strong objections from various interest groups.

Government measures regarding support provided to farmers and the dispute over wages in the public transportation sector led to a state of paralysis as a result of the sit-ins and strikes that the country witnessed last week.

Finance Minister Christian Lindner and German Central Bank President Joachim Nagel rejected the criticism directed at the government and said that they expect the German economy to adapt to the new situation and recover during the current year.

Lindner says that, similar to the European Commission’s forecasts, the economy will start to grow again thanks to a recovery in global demand and lower inflation.

But the recovery in global demand in particular may collide with a decline in global trade by 1.3% between the months of November and December 2023 due to the prevailing state of tension in the Red Sea and the attacks by the Houthis in Yemen on commercial shipping ships related to Israel, according to the group, which says that its move came In response to what is happening in Gaza.