Preliminary data released on Tuesday showed the German economy unexpectedly contracted in the second quarter, lagging further behind a recovery in the rest of the euro zone.
Output in Germany, Europe's largest economy, fell 0.1 percent from the previous quarter after rising 0.2 percent in the first quarter, the Federal Statistical Office said.
The second-quarter data surprised analysts surveyed by FactSet, who had expected a 0.1 percent increase.
Destatis said there was a significant decline in investment in capital equipment and construction between April and June.
“The German economy is in crisis,” said Klaus Wohlrabe, head of research at the Ifo economic institute, citing continued weakness in manufacturing and sluggish private consumption.
“We expect little improvement in the third quarter of 2024,” he added.
Germany, traditionally the driving force behind European economic growth, is struggling with high inflation, an industrial slowdown and fading demand for exports, becoming the only major developed country to see its economy shrink in 2023.
A series of indicators suggested the economy was beginning to recover earlier this year, but weak data in recent weeks has dampened hopes for a strong recovery.
“Germany's economic situation is very poor at the moment, especially compared to neighbouring European countries which are recording fairly solid growth,” said Jens-Oliver-Nicklas, an economist at LBBW.
“Of course, Germany's export-oriented industries, for example, are more vulnerable to weakness in the Chinese economy, but many of the problems have domestic roots,” he added.
Germany's woes are being exacerbated by a shortage of skilled workers, cumbersome bureaucracy, a costly transition to green energy and years of underinvestment in infrastructure.
The comparison with other major euro zone countries was stark, with the French economy posting a better-than-expected 0.3 percent growth in the second quarter.
The Spanish economy also grew by 0.8%, beating expectations, thanks to rising exports and solid household spending.
Overall, output in the 20-nation euro zone grew 0.3 percent in the second quarter, beating analysts' expectations of a 0.2 percent rise.
– Persistent inflation –
Chancellor Olaf Scholz's government expects the German economy to grow 0.3 percent this year as consumer spending rises amid further easing inflation and falling interest rates.
But more worryingly, German inflation rose to 2.3% year-on-year from 2.2% in July, according to Destatis, even though analysts had expected it to remain stable.
Services sector inflation remained high at 3.9%, while food price inflation accelerated slightly.
The European Central Bank will be closely monitoring the latest inflation and growth data as it considers whether to cut interest rates again in September after last month cutting borrowing costs for the first time since 2019.
Carsten Brzeski, an economist at ING, said Tuesday's data release “didn't make things any easier” for the ECB.
He added that persistently high inflation, in particular, “would raise doubts about further rate cuts at the September meeting.”
