The German economy continues to stagnate. Germany is often called the „sick man“ of Europe, as it was at the beginning of the new millennium. For the next year, after a slight decline of 0.1 percent in the current year, one can only expect modest growth of 0.3 percent in 2025. Growth should then accelerate to 1.0 percent in 2026.
The German economy continues to stagnate. Germany is often called the „sick man“ of Europe, as it was at the beginning of the new millennium. However, considering the severity of the economic consequences of Russia’s war of aggression, with high energy prices, inflation, and sanctions, the German economy has held up remarkably well. At the beginning of the war, a deep recession was sometimes predicted. The German economy must, therefore, still be fundamentally strong – it still has many innovative companies, resourceful engineers, and competent skilled workers. Apart from the years around the turn of the millennium, until recently, overall economic productivity – that is, income per working hour – increased as strongly as in the USA. However, this strong foundation is threatened by economic weakness. Recent years have also mercilessly exposed structural challenges for Germany. On one hand, there has been insufficient domestic investment, infrastructure and digitalization have been neglected, and the energy transition has been delayed. On the other hand, the country has long relied on a business model based on strong export growth. Unhealthy dependencies have developed – such as on China for exports and on Russia for cheap energy imports. Added to this are increasing bureaucracy and now also domestic political uncertainties.
Germany’s economic problems are significant. However, the spreading pessimism is unreasonably intensified because Germany’s still numerous strengths often receive too little attention in public discussion. While Germany’s industrial base is damaged, it remains robust, particularly with many global market leaders in niche sectors. In the automotive industry, Germany needs to catch up in electric vehicles. However, this is not due to a lack of technological capabilities but primarily due to management errors. Germany also has many strengths in areas such as artificial intelligence and biotechnology. However, there are difficulties in commercializing results from basic research, especially compared to the USA. This is where action must be taken to prevent a „medium-technology trap“ where the German economy loses touch with these high technologies.
An end to the stagnation phase has yet to be in sight. After the economy expanded slightly by 0.1 percent in the past quarter, stagnation or a slight decline appears more likely in the fourth quarter. Development in many export markets, such as China, remains challenging, as shown by the recent weak export performance. Moreover, both domestic and foreign policy uncertainties have increased considerably recently. The results of the early elections for the Bundestag could further intensify the fragmentation of the party landscape and again lead to a coalition where parties with different positions must laboriously find common ground. Thus, there is also high uncertainty regarding the direction in critical policy areas such as energy or tax policy or potential adjustments to the debt brake. Internationally, Donald Trump’s election as the new U.S. President brings significant uncertainties regarding the United States‘ economic and foreign policy direction. In particular, the future trade policy of the United States is still difficult to assess. In the worst case, significant tariff increases for imports from the EU are threatening.
German industry, in particular, continues to show significant weakness. Industrial production declined again in September after a small intermediate high. The business climate also darkened again in November – companies are particularly more pessimistic about the current situation. In manufacturing, expectations also deteriorated slightly.
The situation also remains challenging in the service sector. At least retail sales have risen slightly recently. Consumer sentiment should improve somewhat, thanks to lower inflation. Meanwhile, the labor market situation remains mixed. There are layoffs, particularly in industry. However, the labor market situation is still remarkably good considering the prolonged period of economic weakness.
The German economy is in a difficult situation where cyclical weakness and structural problems threaten to reinforce each other. For the next year, after a slight decline of 0.1 percent in the current year, one can only expect modest growth of 0.3 percent in 2025. Growth should then accelerate to 1.0 percent in 2026.
Kommentar verfassen