(Bloomberg) -- Germany continued to dodge a recession in the wake of the energy crisis, despite shrinking in 2023 with this year set to bring only a meager rebound.

Gross domestic product fell 0.3% between October and December, according to a preliminary estimate Monday. But with the previous three months revised up to 0% from -0.1%, Europe’s largest economy avoided two straight quarters of contraction.

It was nevertheless a tough year: GDP also shrank 0.3% over the full 12 months — the first such downturn since the pandemic. It’s a stark contrast to peers around the globe — it probably was the only Group of Seven economy to contract — and one that’s raising questions about the country’s future as an industrial powerhouse.

Ongoing concerns about Germany’s prospects are reflected in expectations for this year. The OECD said in November that, at 0.6%, growth will be the slowest among all Group of 20 members except Argentina. Economists predict minimal growth in the first half of 2024, a year that’s kicked off with train strikes and nationwide protests by farmers.

Analysts at Deutsche Bank AG, Commerzbank AG and ING Groep NV even see output continuing to shrink over the whole of 2024. Survey-based indicators have yet to signal improvement and industrial production is increasingly affected by declining order intake, according to Commerzbank’s Joerg Kraemer. 

Initial feedback from polls “suggests that economic performance is likely to stall in 2024,” according to the industry lobby DIHK Chambers of Industry and Commerce. “Even remaining in recession is still possible. The economic challenges remain great.”

What Bloomberg Economics Says...

“We expect growth to slowly ramp up in 2024 and reach 0.5% for the year as higher real incomes may give household consumption a boost. However, the recent setback in business expectations underlines the risk that more pronounced industry weakness will cause the slowdown to continue in 1Q24.”

—Martin Ademmer, economist.

Germany, the first in the G-7 to report a fourth-quarter GDP estimate, had been singled out by forecasters in 2023 as the biggest weak spot among the world’s major developed nations. That’s largely due to its manufacturing sector reeling from higher energy costs, surging interest rates and subdued foreign demand.

While the year began with relief that the energy shock triggered by Russia’s war in Ukraine would be more manageable than initially feared, the economy lost steam and never regained traction. A recovery that had been expected in the second half of the year failed to materialize, with activity faltering even as inflation retreated.

Weighing on output in 2023 were manufacturing, state spending and private consumption, which were all down, the statistics office said.

The disappointing performance sparked a debate over whether Germany is once again turning into the “sick man” of Europe — a moniker it first earned after reunification in the 1990s weighed on the economy and brought stubbornly high unemployment.

Top officials including Finance Minister Christian Lindner and Bundesbank President Joachim Nagel have dismissed such talk, insisting the country has proved it can adapt to a changing environment.

The central bank has nevertheless acknowledged challenges to a business model that was long based on Russian energy imports and a strong reliance on China — both for components and as a market for combustion-engine cars.

While natural gas prices have fallen sharply from a peak reached after the Kremlin cut off supplies, they remain higher than before Covid struck. The chemical industry is among the sectors most affected, with companies including BASF SE and Lanxess AG responding by shelving investments and laying off workers.

Continued squabbling within Chancellor Olaf Scholz’s three-party alliance has, meanwhile, highlighted the difficulty in agreeing measures to tackle Germany’s woes.

That’s helped feed a surge in popularity for the far-right AfD, which now leads polls in three eastern German provinces that hold elections this year. Most recently, dissatisfaction with the government has brought protests by farmers, who disrupted traffic nationwide last week and held their main rally in Berlin on Monday.

According to the farmer’s lobby association, 30,000 people joined the protest in the center of the capital. More than 6,000 tractors and other vehicles clogged the streets around the government quarter. 

The Constitutional Court created further headwinds at the end of 2023 by disrupting the coalition’s plans to finance investments via off-balance sheet funds, forcing savings in the current budget and fueling fresh uncertainty among households and firms.

“We had a rather weak 2023 so 2024 will not be a brilliant year but we will see growth picking up a little bit,” Bundesbank President Joachim Nagel told Bloomberg Television in Davos, Switzerland. “I think Germany has to do its homework.”

--With assistance from Joel Rinneby, Kristian Siedenburg, Michael Nienaber, Jana Randow, Mark Schroers, Francine Lacqua and Arne Delfs.

(Updates with economists’ comments in fifth paragraph.)

©2024 Bloomberg L.P.