Germany skirts recession at the end of 2023 but faces prolonged slump

Europe's largest economy contracted by 0.3% year-on-year in 2023, as high inflation and firm interest rates bit into growth, the Federal Statistical Office of Germany said Monday.

The estimate is in line with the expectations of analysts polled by Reuters. The decline in economic output eases to 0.1% when adjusted for calendar purposes.

"The overall economic development in Germany stalled in 2023 in the still crisis-ridden environment," said Ruth Brand, president of the federal statistics office, according to a Google translation. 

"Despite the recent declines, prices remained high at all levels of the economy. Added to this were unfavorable financing conditions due to rising interest rates and lower demand from home and abroad," Brand added.

German inflation ticked up by 3.8% year-on-year in December on a harmonized basis, the statistics office said on Jan. 4. The European Central Bank in December opted to hold rates unchanged for the second consecutive time, shifting its inflation outlook from "expected to remain too high for too long" to expectations that it will "decline gradually over the course of next year."

Germany's manufacturing sector, excluding construction, fell by a sharp 2%, led by lower production in the energy supply sector. Weak domestic demand last year and "subdued global economic dynamics" also stifled foreign trade, despite a drop in prices. Imports fell by 1.8%, declining more sharply than exports and leading to a positive trade balance.

Household consumption contracted by 0.8% on the year, adjusted for prices, while government expenses slimmed by 1.7%.

The fourth quarter recorded a similar 0.3% drop compared with the July-September period. The office said that the German economy stagnated in the third