Will the German Economy Rebound from Its Continued Underperformance?
Germany has long been known for its strong performance on the global economic stage. Whether in the auto industry, machinery, engineering, or food processing, Germany has always placed itself at the top in terms of economic output and success on an international level. Germany essentially rebuilt itself from the ground up after World War II, when its economy and people were in disarray. Today, when people think of powerful economies, they often regard Germany as a major force—strong, prevalent, and important within specialized industries. However, recently, Germany’s economy has been underperforming, prompting people to question why this is happening.
The reasons behind Germany's economic struggles are complex, but the most concerning aspect is that Germany is on track to officially close 2024 in recession, marking its second consecutive year of contraction, with an expected 0.2% decline. One of the biggest issues facing Germany’s economy is its structural reliance on the manufacturing sector, coupled with global competition, especially from China. Germany has seen a significant slump in export orders, as its manufacturing industry struggles to keep pace with other global competitors like China. Unfortunately, sectors that have historically performed well in Germany, such as automotive and mechanical engineering, are finding it difficult to adapt to the intense competition abroad, especially from countries like China.
Unemployment has become another major factor in Germany’s struggling economy. In August 2024, it rose to 6.1%, a jump of 0.3% from the previous year. Unfortunately, economists believe this trend will continue, with large companies like Volkswagen and other major industry players likely to reduce their workforce due to low productivity, which has recently been a significant issue. The war in Europe hasn’t helped either, as access to cheap Russian gas is no longer available, leaving companies grappling with extremely high energy costs. While Germany’s clean energy initiative has shown progress, some companies have found the transition challenging. ThyssenKrupp, the national steel champion, is notably struggling to switch from coal-fired furnaces to those powered by hydrogen. Establishing hydrogen-powered furnaces requires a substantial amount of wind power and electricity, which is costly and difficult to achieve.
German politics isn’t helping the economy either. The Social Democrats have struggled to secure important geographic areas, as demonstrated in the recent state elections in August. This has raised concerns that the country may shift toward the center-right Christian Democratic Union, which is polling far ahead of the Social Democrats. Such a shift could mean a return to a combustion engine-based economy, potentially disregarding climate concerns in favor of focusing solely on boosting productivity within the country.
With all these issues emerging, and with Germany’s reliance on the industrial and manufacturing sectors being a prominent concern, the question remains: how will Germany address these challenges and turn the page? Many predict a strong return for the German economy in 2025, with projections as high as 1.1% GDP growth, potentially increasing to 1.6% in 2026. Germany plans to achieve these growth figures by increasing investment, enhancing productivity, and addressing long-standing structural issues. The German economy also hopes inflation predictions will meet their targets. Last year, inflation rate was at 5.9%, and officials are now aiming to reduce these rates to 2.2% by the end of 2024.
The German economic minister believes it is essential for Germany to follow through with the current economic plan, stating, “the economy will be stronger, and more people will come back to work.” However, speculation remains, as Germany’s political landscape is complex, with each party proposing different approaches to resolving the economic situation. Unfortunately, many of Germany's economic problems can be traced back to the Central Bank’s decision to raise interest rates when inflation surged. While this move was an appropriate response to cool inflation, it caused significant issues across the economy,, including housing and other interest-sensitive sectors.
Another challenge has been the shift in global demand from manufactured goods to the services sector, which has put additional strain on Germany’s manufacturing-dependent economy. Among Western economies, there’s a difficult truth that many countries, including Germany, must face: the rapid aging of the population. Germany’s low fertility rate of 1.35, well below the replacement rate of 2.1, is expected to worsen the aging population issue, as fewer people will be available to fill the jobs left by older generations. One possible solution to this demographic challenge is artificial intelligence, which could compensate for the shrinking workforce. This remains an ongoing question for the future, as AI has already replaced some jobs and will likely continue to do so as technological advancements progress.
For Germany’s economy to grow in the coming years and recover from recent losses, the country must reduce its dependence on the industrial and manufacturing sectors. Instead, it should focus on research, development, and entrepreneurial projects that could drive long-term growth.
Image courtesy of Faruk Pinjo via Flickr, ©2023. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St. Andrews Foreign Affairs Review team.
