Call Germany’s economic health moribund, and you won’t be wrong. The European powerhouse became the world’s worst-performing large economy in 2023 when its output fell by 0.3% from 2022.
Germany Economy Minister Robert Habeck said that his government’s forecast for 2024 growth had been revised down from 1.3% to 0.2%. In contrast, the United States economy is predicted by the International Monetary Fund (IMF) to grow by 2.5% in 2024, while China’s economy is predicted to grow by 5%. Germany’s plight, described by Habeck as “dramatically bad,” is also hurting the European Union’s economic health.
The country has been severely impacted by the rise in energy prices, since Russia’s invasion of Ukraine in 2022. Significant inflationary pressures have affected the efficient production processes of German companies.
German businesses are finding it more difficult to obtain funding due to rising interest rates, which have also increased their operating expenses and decreased both domestic and foreign demand.
Additionally, China has decelerated and begun to make investments toward self-sufficiency, lessening its reliance on imported goods and services as well as foreign technology. For German businesses that have heavily depended on the Chinese market over the previous 20 years, this is undoubtedly a problem.
According to the IMD World Competitiveness Ranking, Germany has been slipping behind other leading economies. Placed fifteenth overall in 2022, it fell seven spots in 2023 as all four ranking factors—economic performance, business efficiency, government efficiency, and infrastructure—deteriorated.
Judging the situation’s gravity
As per Habeck, Germany’s reliance on exports has made it particularly vulnerable to changes in global trade patterns. Another broader structural problem for the German economy is its lack of workers. On top of these, add the soaring energy costs and the resultant inflation, which are squeezing German households further.
“In its monthly report, the Bundesbank said ‘stress factors’ would probably remain and that economic output could therefore decline again slightly in the first quarter of 2024. Two negative quarters in a row would put Germany into a so-called technical recession,” BBC reported.
What is stopping the analysts from calling it a full-blown recession for the country is the fact that the German economy is predicted to grow slightly in 2024. And there are some indications towards that in the form of falling inflation, low unemployment and reduced energy costs.
Despite gloomy predictions, Germany successfully pivoted away from Russian gas without blackouts, and wages are rising in many sectors to boost consumer demand, yet businesses remain pessimistic, according to the BBC.
They blame political in-fighting behind the country’s economic woes. Habeck’s ministry has drafted legislation which should cut bureaucracy and give German businesses billions of euros of tax breaks.
The law, despite clearing the huddles in the German parliament’s lower house, got blocked by opposition conservatives in the upper house. And yes, squabbling within Chancellor Olaf Scholz’s three-way governing coalition is not a secret anymore.
Even if economists’ optimism around Germany avoiding recession comes true, the harsh reality is that the European giant is facing growth stagnation, something which can only be cured through policy course corrections. How it can be done? Let’s find out.
Diversify, diversify and diversify
Germany needs to stop depending too much on China to be its main trading partner. Since 2015, China has been Germany’s most significant trading partner, and in 2022, trade between the two reached a record high.
Berlin has long acknowledged that its reliance on China is too great, but changing manufacturing practices is a slow process that will eventually have negative effects on the country’s economic performance.
Consider Volkswagen, which, despite selling only about 3 million cars annually and a peak of over 4 million in 2018, remains a significant player in China, where local companies like BYD have benefited from the rapid shift to electric vehicles.
Foreign automobiles’ market share in China decreased from 64% in 2020 to 44% in 2023. For German corporations such as Volkswagen, the task lies in converting this into a chance for increased diversification.
“It will be challenging to diversify while keeping up current trade and investments in China, though, as we should anticipate that the Asian nation will charge more for international businesses to access its domestic market. But in an uncertain geopolitical environment like this, diversification needs to be the top strategic goal,” The Conversation reported.
According to a recent analysis, by Kiel Institute for the World Economy located in Germany, the country’s economy would contract by 5% in the event of an abrupt stop to trade with China, matching the COVID-19 pandemic or the global financial crisis in terms of severity.
Borrow to invest
Germany inserted a “debt brake” into its constitution in 2009. It was believed that the rule, which drastically limits Germany’s capacity to borrow and run deficits, would encourage prudent spending and guarantee the stability of the public finances.
As Greece and other nations struggled with their debts in the years following the global financial crisis, Angela Merkel and the so-called Troika of the European Commission, European Central Bank, and IMF adopted this as their catchphrase.
But now, things have drastically changed in the area. Due to the “debt brake” clause, Germany’s constitutional court recently halted the transfer of €60 billion (£51 billion) from a pandemic budget to a climate fund. This has resulted in an unresolved budget crisis.
More broadly, because Germany and the European Union compete with other nations that support their businesses, the debt brake has grown to be a significant challenge. Brussels, for example, has opened an enquiry into the possibility of significant market distortions brought about by Chinese state subsidies in the automobile industry.
To help companies transform and remain competitive globally, Germany’s only viable option is to make significant investments in R&D, infrastructure, and more efficient state operations. Increased reliance on debt is necessary to finance this.
Embrace European innovation
According to recent statistics from the Bundesbank, foreign direct investment in Germany fell to €30.5 billion in the first half of 2023 from €34.01 billion in the corresponding period of 2022. This is the lowest inflow number in nearly 20 years and a sharp decline.
It urges serious consideration of Germany’s declining competitiveness and its capacity to draw in foreign capital. Investing in innovation via European Union-led R&D is the only way to reverse this downward trend. Innovation has long been the driving force behind the economic success of Germany and the European Union.
At just over 3% of GDP annually, Germany is among the countries in the bloc that spends the most on research and development. However, considering that the United States and Japan currently invest close to 3.5% of GDP, this is about the same as they were ten years ago. Germany (and the EU) must step up R&D and stay up to date with the latest technological developments.
In a globalised world where nations ranging from China to the US are progressively providing corporate subsidies and implementing policies to safeguard their domestic economies, Germany needs to allocate long-term resources towards government efficiency, infrastructure development, and the promotion of corporate ecosystems. Increased foreign investment will result from this, which is essential for Germany and its EU counterparts to innovate and maintain their competitiveness in the global market.
Meanwhile, according to a Reuters’ story citing the Bundesbank, the German economy was probably in recession in the first quarter of 2024 as weak industrial demand and consumer spending continued to delay the recovery.
According to a Bloomberg survey conducted from March 8–14, the nation’s GDP will shrink by 0.1% in the first quarter.
For the first three months of the year, analysts were forecasting stagnation. Since the start of the Russia-Ukraine war, the largest economy in Europe has struggled due to rising energy and borrowing costs, but recent indicators, including PMI data and sentiment figures from the ZEW Economic Research Institute, suggest that at least a bottom has been reached.
Policy reform for industrial workers
Germany, which has long prided itself on its “nondisruptive working culture,” has been hamstrung by a wave of strikes in 2024. The first three months of the year have had the most strikes in the European country in 25 years.
Be it railways, airports, hospitals or banks, worker agitations have taken a full toll on the German economy, so much so, that Jens Spahn, deputy leader of the conservative Christian Democrats in the Parliament, denounced a “strike madness” that he said risked paralysing Germany.
As the country faces stalled growth, the burden has fallen most heavily on its low- and middle-income workers. Since 2022, their real wages have shrunk more than at any time since the Second World War. To aggravate the problems further, the European giant is facing an ageing population, with officials estimating there will be a shortage of seven million workers by 2035.
Apart from demanding inflation-adjusted pay raises, the workers have also been vociferous about better working conditions, the ability to plan work shifts and vacations long in advance, a better work-life balance and fewer hours.
As per the analysts, Germany’s tax system taxes income far more heavily than it does private wealth, disproportionately affecting low- and middle-income workers. And it needs to be changed.
Clemens Feust, president of the Ifo Institute for Economic Research, told the New York Times that working full-time can be more costly than staying at home. Because of the way taxes are structured for married couples, a family with one partner working full-time and the other working part-time had more income at the end of the month than two full-time working parents.
The strikes are piling up a massive economic risk as critical infrastructures grind to a halt. The one-day strike at airports in March 2024 grounded some 570 flights and affected 90,000 travellers. The Kiel Institute for the World Economy has estimated that the train conductors’ strikes cost the German economy about 100 million euros per day.
However, the disruption also brings an opportunity for the German government to ensure a serious policy reform, which will give the industrial workers both financial and occupational security. After all, one can only ensure a “nondisruptive working culture,” if the participating labour force is happy about their jobs and are eager to invest themselves more in their country’s economic progress.