Germany's recession fears return ahead of election

By Maria Martinez

BERLIN (Reuters) - The German economy contracted more than expected in the final quarter of last year, reigniting recession fears as Europe's biggest economy is beset by political uncertainty ahead of a snap election.

Germany's gross domestic product fell by 0.2% in the fourth quarter compared with the previous three-month period, preliminary data from the statistics office showed on Thursday.

Analysts polled by Reuters had forecast a 0.1% quarter-on-quarter decrease in adjusted terms.

The euro zone's two largest economies, Germany and France, both contracted in the fourth quarter, while the Italian economy stagnated.

If first quarter growth for 2025 is also negative in Germany, the economy will fall back into recession - normally defined as two consecutive quarters of contraction.

For the first quarter, leading indicators such as the Ifo business climate or incoming orders are not yet signalling any improvement, said Commmerzbank chief economist Joerg Kraemer.

"From the spring onwards, an anaemic upward trend is on the cards at best," Kraemer said.

Increasing competition from abroad, high energy costs, elevated interest rates and uncertain economic prospects have taken their toll on the Germany economy, which contracted in 2024 for a second year in a row.

In its annual economic report, the government cut its growth forecast for 2025 to 0.3% from a previously expected 1.1% due to trade tensions and domestic uncertainty over the upcoming election.

Some business associations forecast another contraction this year, putting Germany on track for three years of decline for the first time since reunification.

"Contrary to the early 2000s, when Germany's economic sickness or problem was high unemployment and a rigid labour market, the current problems are much more diverse and hence even more difficult to solve than they were 20 years ago," said Carsten Brzeski, global head of macro at ING.

The dispute over how to revive Germany's ailing economy contributed to the collapse of the government in November, setting the stage for the snap election on Feb. 23, in which the economy is the top concern among voters.

The German economy has not grown at all in the last five years, said Andrew Kenningham, chief Europe economist at Capital Economics.

"The structural stagnation in Germany will drag on for some time notwithstanding the likely easing of fiscal policy after the election," Kenningham said.

(Reporting by Maria Martinez and Miranda Murray, Editing by Rachel More and Toby Chopra)