Germany is expected to experience a prolonged recession this year, making it the only major European economy to contract in 2023, according to the European Commission’s latest forecasts. The Commission, the executive arm of the EU, predicts a 0.4% decline in Germany’s economic activity for this year, which is lower than the estimate made in May. Additionally, the growth expectations for Germany in 2024 have been reduced from 1.4% to 1.1%.

The German economy has been struggling due to various factors, including the impact of Russia’s invasion of Ukraine and the need to quickly reduce energy dependency on Russia. In July, the International Monetary Fund projected a contraction of 0.3% for Germany this year. This has led some economists to refer to Germany as the “sick man of Europe,” a term originally coined in 1998 when the country faced significant economic challenges. Recent data also shows a sharp decline in manufacturing activity in Germany.

However, not all economists agree that Germany’s current situation can be compared to previous downturns. Holger Schmieding, chief economist at Berenberg, pointed out that Germany currently has record employment, strong labor demand, and a favorable fiscal position compared to other major advanced economies, which makes it better equipped to handle shocks.

The latest economic forecasts indicate a general slowdown across the European region. The 27 economies of the EU are now projected to grow at an average pace of 0.8% this year, down from the previous estimate of 1%. The forecast for next year is also more pessimistic, with the EU expected to grow by 1.4% instead of the previously estimated 1.7%.

The European Commission attributes this slowdown to weak domestic demand, particularly in consumption, which is being heavily impacted by high consumer prices for goods and services. High inflation remains a major challenge for the bloc, and while consumer prices are expected to decrease in the coming months, they are still likely to remain above the European Central Bank’s target of 2% by the end of 2024. Inflation in the euro area is projected to be 5.6% in 2023 and 2.9% by the end of 2024.

The European Commission expects inflation in services to gradually decrease as demand softens due to monetary policy tightening and the fading post-COVID boost. However, there are concerns that price pressures may persist for a longer period. The European Central Bank is due to announce whether it will raise interest rates again in its upcoming meeting, as it has been attempting to combat high inflation by increasing rates since July 2022.