Persistent inflation, high energy prices and weak foreign demand drove the fall.
Official data released Monday (January 15) showed GDP shrank 0.3% over the full-year - in line with analyst forecasts.
Germany's statistics office said prices remained high and hurt economic growth.
As a result, the country's economy did not continue its recovery from the sharp economic slump seen in the global health crisis.
But GDP was still 0.7% higher last year than in 2019, the year before the health crisis hit.
Economic performance in industry, excluding construction, fell 2% in 2023.
That was due to much lower production in the energy supply sector.
Household consumption in 2023 was down a price-adjusted 0.8% on the previous year.
The slow pace of growth of the global economy and weak domestic demand in 2023 also hurt foreign trade, which declined despite falling prices.
The German economy shrank by 0.3% in the final quarter of last year compared with the previous period.
However, the euro zone's largest economy stagnated in the previous quarter, after earlier negative numbers were revised upwards.
That means the country didn't quite see two straight quarters of contraction, the usual definition of a recession.
