Germany

German economy: sizeable recovery is still not on the horizon for 2024

Growth momentum is expected to lose steam in 2024, as the strong performance from agriculture (7% of 2023 GDP) witnessed in 2023 (annual expansion of 15%) will not be repeated. The German economy stopped growing between spring 2022 and the end of 2023. In addition, only a slow and small recovery is expected for 2024. The future of its manufacturing industry continues to hang in the balance. This major sector has been in recession since the end of 2018 in terms of production activity and resumed its downward trajectory after the intermission engendered by the pandemic. Weak order books are weighing on the outlook. At the start of 2024, a survey by the Ifo Institute stated that 37% of companies reported a significant lack of orders. Increased financing costs and uncertainty about the actual design of political support measures (e.g. the growth opportunity law, “Wachstumschancengesetz”, which should provide tax relief measures for companies) were putting the brakes on investment at the beginning of the year. The abrupt end to subsidies for the purchase of electric cars has also had a negative impact on companies' investment activity. Little support can also be expected from the construction industry. Here, the combination of continued high financing and production costs in conjunction with a lack of skilled labour led to a decline in building permits at the turn of 2023-2024 to the 2010 level. Even if interest rates for construction loans are falling somewhat, the construction industry is more likely to stabilise than recover this year. By contrast, the service sector, e.g. in tourism and leisure should continue to develop relatively robustly in 2024, as it is likely to benefit from rising purchasing power.

On the demand side, there should be a slight recovery in private consumption (52% of GDP) over the course of the year. The main reason for this is that real wages have risen again slightly since mid-2023 due to a significant increase in nominal wages (6% year-on-year on average in 2023, including inflation compensation payments, i.e., the strongest increase in the last 15 years) and decreasing inflationary pressure. The Bundesbank expects nominal wages to rise by 5% year-on-year in 2024, while the annual consumer price inflation rate fell below 3% at the start of 2024. However, as the base effects, which favoured the sharp fall in the inflation rate in the winter half-year 2023-2024, have come to an end, there are signs of moderate price pressure for the remainder of 2024, which should keep the annual inflation rate between 2.4% and 2.0%. All of this would bring a further increase in real wages, 2.7%, by far its strongest in the last 16 years. The lower price pressure, which should also be evident in other European countries, will push the European Central Bank (ECB) consider introducing its first interest-rate cuts. The ECB should cautiously lower interest rates from June 2024. A total of up to three cuts should be in the pipeline for the year 2024. However, the number and scope of the cuts will clearly depend on the development of (core) inflation and nominal wages. At the same time, while the ECB will fully reinvest the principal payments from maturing securities purchased under the Pandemic Emergency Purchasing Programme (PEPP) during the first half of 2024, it intends to reduce reinvestments by €7.5 billion per month in the second half of the year and cease completely thereafter. Although looser monetary policy should revitalise private investment somewhat in the second half of 2024, little fiscal support is expected from the government as the government is on a strict austerity path with only limited investment projects dedicated mainly to digitalisation and the green transition. Foreign trade should continue to provide little impetus. Both the US and China are unlikely to be able to maintain their 2023 growth momentum into 2024, therefore weighing on German imports. The picture is also mixed in Europe. While the economies of France, Italy, and Spain are also likely to experience weaker growth, slightly higher demand is expected from the Netherlands and the UK.

The brake on debt resumes

2024 is the first year since the start of the pandemic where the brake on debt has applied, according to which the federal and state governments may only incur net structural borrowing of 0.35% of nominal GDP (not including long-term special funds or “Sondervermögen”, e.g., for the Bundeswehr), except in the event of natural disasters and exceptional emergency situations. This is possible as all pandemic measures and most of those to mitigate the energy price crisis expired in 2023 or will during the course of 2024 (e.g., VAT on gas and district heating was increased again from 7% to 19% in April 2024). Moreover, additional savings pressure arose when the Federal Constitutional Court in November 2023 retroactively declared unconstitutional the supplementary budget for 2021 (at the time, unused pandemic support, for which the brake on debt brake law was specifically suspended, was reallocated to climate projects). However, as these climate projects were already being implemented, the court’s ruling meant that the 2024 federal budget suddenly lacked funding of EUR 60 billion, which meant significant cost-cutting measures for almost all ministries.

Germany’s current account surplus should recover further due to the improvement in the terms of trade, together with a small increase in export volumes and constant import volumes. The structural services deficit should widen as costs for vacation abroad increase, although the numbers of German outbound tourists should remain roughly unchanged. The surplus of the investment income balance and the balance of current transfers (deficit) should see only small changes.

The first three-party-governing coalition is (still) struggling to cope

Since December 2021, German Chancellor Olaf Scholz (Social Democrat, SPD) has led the very first three-party coalition in German history with the SPD (207 out of 735 seats in Parliament), the environmentalist Greens (118 seats) and the liberal FDP (91 seats). Political life is characterised by large-scale public infighting between parties on legislative projects. The tough negotiations to reduce budget spending for 2024 did not simplify the coalition's work. As part of the cuts, the government decided to cancel tax subsidies to farmers (raising the agricultural diesel price to the normal diesel price), which led to various protests by farmers in the first few months of 2024. As savings had to be made in almost all ministries, social spending was also affected. The right-wing AfD (Alternative for Germany) particularly benefited from the political uncertainty in the second half of 2023 and at the beginning of 2024, holding steady at between 21% and 23% in the polls. This put it in second place behind the Christian democratic-conservative CDU/CSU (solidly around 31%), ahead of all governing parties. Following calls for a tough migration policy that would include expulsion of even German citizens with dual citizenship, large protests emerged all over Germany and support for the AfD fell slightly (to around 17%). At the same time, two new parties were founded that are in the conservative sphere. The left-wing conservative party Bündnis Sarah Wagenknecht (BSW) split from the Left Party. BWS has 10 seats in the Bundestag and is represented in three state Parliaments. As a result of the split, the Left Party lost its Parliamentary group status in the Bundestag. The BWS was polling between 5% and 7% in spring 2024 and could therefore enter the Bundestag, in the next election. From the very conservative ranks of the CDU/CSU, on the other hand, the WerteUnion (WU), founded in February 2024, is not represented in any Parliament and would not have enough votes to enter the Bundestag. The losers in this latest upheaval in the party system are the liberal governing party FDP, which has support of around 5% and could possibly miss out on a place in Parliament, as well as the Left Party, which is consistently below the 5% threshold in current polls. The Social Democrats and Greens have also lost significant support since the last election. As the current government coalition would, by far, lose its majority, a breakup and early elections are unlikely. The next general election is scheduled for September 2025.

Payment

Bank transfer (Überweisung) remains the most common, means of payment. All leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. The SEPA Direct Debit Core Scheme and the SEPA Direct Debit B2B are the newest forms of direct debit.

Bills of exchange and cheques are not used very widely in Germany as payment instruments. For Germans, a bill of exchange implies a critical financial position or distrust in the supplier. Cheques are not considered as payment as such, but as a “payment attempt”: as German law ignores the principle of certified cheques, the issuer may cancel payment at any time and on any grounds. In addition, banks are able to reject payments when the issuing account contains insufficient funds. Bounced cheques are fairly common. As a general rule, bills of exchange and cheques are not considered as effective payment instruments, even though they entitle creditors to access a “fast track” procedure for debt collection in case of non-payment.

Debt Collection

Amicable phase

The amicable collection is an essential step to the success of collection management. The collection process generally begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding the debtor of their payment obligations.

According to the law for the acceleration of due payments (Gesetz zur Beschleunigung fälliger Zahlungen) a debtor is deemed to be in default if a debt remains unpaid within 30 days of the due payment date and after receipt of an invoice or equivalent request for payment, unless the parties have agreed to a different payment period in the purchase contract. In addition, the debtor is liable for default interest and reminder fees upon expiry of this period.

Debt collection is recommendable and common practice in Germany.

Legal proceedings

Fast-track proceeding

Provided the claim is undisputed, the creditor may seek order to pay (Mahnbescheid) through a simplified and cost-efficient procedure. The creditor describes the details of their claim and is subsequently able to obtain a writ of execution fairly quickly via the Online-Dunning Service (Mahnportal), direct interfaces or (only for private individuals) pre-printed forms. Such automated and centralised (for each Bundesland, federal state) procedures are available all over Germany.

This type of action falls within the competence of the local court (Amtsgericht) for the region in which the applicant’s residence or business is located. For foreign creditors, the competent court is the Amtsgericht Wedding (in Berlin). Legal representation is not mandatory.

The debtor is given two weeks after notification to pay their debts or to contest the payment order (Widerspruch). If the debtor does not object within this timeframe, the creditor can apply for a writ of execution (Vollstreckungsbescheid).

Ordinary proceedings

During ordinary proceedings, the court may instruct the parties or their lawyers to substantiate their claim, which the court alone is then authorised to assess. Each litigant is also requested to submit a pleading memorandum outlining their expectations, within the specified time limit.

Once the claim has been properly examined, a public hearing is held at which the court passes an informed judgement (begründetes Urteil).

The losing party will customarily bear all court costs, including the lawyer’s fees of the winning party to the extent that those fees are in conformity with the Official Fees Schedule (the Rechtanwaltsvergütungsgesetz, RVG). In the case of partial success, fees and expenses are borne by each party on a pro rata basis. Ordinary proceedings can take from three months to a year, while claims brought to the federal Supreme Court can reach up to six years.

An appeal (Berufung) may be brought against the decision of the Court of First Instance if the objected in exceeds €600. An appeal will also be admitted by the Court of First Instance if a case involves a question of principle or necessitates revision of the law in order to ensure “consistent jurisprudence”.

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Enforcement of a Legal Decision

Enforcement may commence once a final judgement is made. If debtors fail to respect a judgment, their bank accounts may be closed and/or a local bailiff can proceed with the seizure and sale of their property.

For foreign awards, in order to obtain an exequatur, the creditor needs a notarised German translation of the decision which also has to be recognised, an enforcement order of this judgment, and an execution clause. Judgments of courts of EU member states are recognised without further procedure – unless certain restrictions arising from European law are applicable.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

Debtors may attempt to renegotiate their debts with their creditors, which helps to protect debtors from early payment requests. However, the procedure is in the creditors’ interest as it can be faster and tends to be less expensive than formal insolvency.

RESTRUCTURING

Following a petition filed before insolvency court on the basis of illiquidity or over-indebtedness, the court may open preliminary insolvency proceedings, where it appoints a preliminary administration aimed at exploring the chances of restructuring the company. If the administration authorizes this restructuration, it then initiates formal proceedings and nominates an administrator in charge of continuing the debtor’s business whilst preserving its assets.

LIQUIDATION

Liquidation may be initiated upon demand of either the debtor or the creditor provided that the debtor is unable to settle its debts as they fall due. Once recognized through a liquidation decision and once the company has been removed from the register, the creditors must file their claims with the liquidation administrator within three months of the publication.

RETENTION OF TITLE

This is a written clause in the contract in which the supplier will retain the ownership over the delivered goods until the buyer has made full payment of the price. There are three versions of this retention:

simple retention: the supplier will retain the ownership over the goods supplied until full payment is made by the buyer;

expanded retention: the retention is expended to further sale of the subsequent goods; the buyer will assign to the initial supplier the claims issued form the resale to a third party;

extended retention: the retention is extended to the goods processed into a new product and the initial supplier remains the owner or the co-owner up to the value of his delivery.

Last updated: April 2024