Europe’s largest economy could be heading for another recession this year, casting a dark shadow over a region that’s buckling under the weight of high interest rates, weak demand, and a lack of investment.

According to Germany’s Süddeutsche Zeitung publication, the German Economy Ministry expects GDP to shrink by 0.2% this year.

If the forecast holds, it would mark the second consecutive year of recession for Germany, which commands the largest GDP of any European economy.

Reeling from high energy prices following Russia’s invasion of Ukraine, Germany was the only advanced nation to enter a recession in 2023.

Government officials now believe it will take much longer for recovery to take root as high energy prices and a weak manufacturing sector affect the average consumer.

“Instead of gaining momentum, the economy continues to be characterized by a general reluctance by consumers to spend,” Süddeutsche Zeitung reported on Sunday.

The one silver lining is that government officials expect the economy to swiftly recover in 2025 and beyond. In the meantime, financial experts are sounding the alarm on a worsening situation.

Economists and financial specialists who contributed to the ZEW Economic Sentiment Index raised these concerns in August.

The ZEW indicator, which tracks experts’ expectations, tanked from 41.8 points in July to 19.2 in August.

“The economic outlook for Germany is breaking down. In the current survey, we observe the strongest decline of the economic expectations over the past two years,” said ZEW president Achim Wambach.

A prolonged recession in Germany only adds to central bankers’ growing sense of urgency to continue lowering interest rates.

Shifting priorities

The European Central Bank (ECB) has grown more confident in its ability to tame inflation.

In September, the eurozone Consumer Price Index (CPI) dipped below 2% for the first time in more than three years, paving the way for another rate cut.

While inflation is expected to rebound moderately in the fourth quarter, ECB President Christine Lagarde said the progress should open the door to another quarter-point reduction next week.

The central bank’s shifting priorities came as more policymakers warned that any delays in cutting rates would put the European Union “at a serious disadvantage.”

“Europe desperately needs growth” and investment, said Piero Cipollone, who sits on the ECB’s Governing Council.

Former ECB chief Mario Draghi said the EU needs to ramp up its support of the economy or face a “slow agony.”

In a recent report, Draghi recommended that the EU provide an additional 800 billion euros ($880 billion) in annual stimulus. Draghi said EU member states, including Germany, should strongly consider providing the additional funding.

Ironically, German Finance Minister Christian Lindner rebuffed the proposals, saying more borrowing programs wouldn’t solve the EU or Germany’s problems.

“Political difficulties in Germany and France, and longstanding divisions among other EU member states, will likely prevent a significant leap forward in integration that Draghi prescribes,” analysts at Eurasia Europe told Reuters.

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