Sorry Prospects for the Once-Unbeatable German Economy
Germany faces serious economic problems, and the prospects for near-term solutions are limited to say the least. Some of the country’s difficulties are entirely homemade, such as extremely high energy costs born of years in which Germany chose to rely on Russian natural gas while otherwise worthy green objectives limited the search for alternative sources of power, nuclear for instance. Other German problems come from outside, such as how Chinese development allowed that country to change from a consumer of German manufactures into a competitor. And now Donald Trump’s White House has raised the specter of punitive tariffs.
Germany’s Woes Are Europe’s Woes
At one quarter the entire European Union (EU) economy, Germany’s problems are to a large extent Europe’s. Poor German economic performance has held back the continent for some time now. Real economic activity in the Federal Republic has stagnated on balance for six years since 2019, the longest period without net growth since the end of the Second World War. Like most of the rest of the world, real economic activity in Germany cratered during the pandemic year 2020, but unlike other nations, Germany failed to come back adequately in 2021 and 2022. Then the German economy began a slow-motion decline. It shrank, albeit modestly, in 2023 and 2024, the first two-year decline since the early 1950s.
Lagging Behind Global Peers
The economy has underperformed most others. German stagnation since 2019 compares, for example, with the 11% real growth in the United States and 5% for Europe as a whole, despite the drag imposed by the German experience. Industrial production in the Federal Republic this past year was 15% below levels of 2018. Unemployment today verges on 6.3% of the workforce, up from 5% as recently as 2022. Capacity utilization at the end of 2024 stood below normal recessionary lows, putting a heavy damper on German industry’s interest in capital spending.
Few Signs of Immediate Recovery
Nor are there any immediate signs of recovery. In the month of February, the most recent period for which data are available, industrial output fell 1.3%. It is some 4% below year ago levels. Auto production—the backbone not just of the German economy generally, but also of its all-important export sector and accounting for one in four jobs—was up smartly in March from the December lows but still showed no net growth over the past year. The recently elected coalition government offers some hope of helpful policy changes, in particular provisions for the immigration of skilled labor, but given the less than stable political environment, it is hard to see the kind of fundamental revisions needed to turn the economy around.
The Energy Crisis Bites Hard
High energy costs account for a lot of these problems. To be sure, German energy costs have dropped from the highs of 2022, the year of Russia’s invasion of Ukraine and the end of German access to cheap Russian natural gas. Although Germany has tried to compensate, buying liquified natural gas (LNG) from the United States and Qatar, the country’s energy prices remain high. Today they remain twice their level before the Russian cutoff and about four times the level in the States, ten times the price in Texas. Nor is it just the loss of Russian supplies. High costs also reflect Angela Merkel’s decision to dismantle Germany’s nuclear power effort and rely on frankly unreliable energy alternatives, mostly wind. It does not help that the German economy is heavily oriented toward heavy, energy-intensive manufacturing. Many of these operations have lost most, if not all their competitive edge on world markets.
While high energy costs have depressed profitability, they have also held back consumer spending in Germany, despite respectable real wage gains, and low rates of capacity utilization, as mentioned above, have discouraged capital spending on the modernizations that might restore German competitiveness and profitability. Meanwhile, changes in China have laid another heavy weight on German economic performance.
The End of a Symbiotic Trade Relationship with China
For years, Germany and China enjoyed a wonderfully symbiotic relationship. The then fast-growing and ever-enlarging Chinese economy seemed to have an insatiable appetite for German manufactures, autos to be sure, but also precision machine tools and other high-end equipment including electronics. At the same time, German industry benefitted from access to cheaper inputs made in China. The profit potentials from this two-way trade redoubled Germany’s emphasis on and employment in heavy manufacturing.
But since the pandemic, the Chinese economy has slowed markedly. Its appetite for German exports has diminished accordingly. Worse, China during this time has upgraded its own manufacturing capabilities and has begun replacing the German product with the output of domestic efforts, both within China and elsewhere. German auto sales have suffered especially. Chinese-made electric vehicles (EVs), for instance, now dominate almost half that country’s domestic auto market, displacing Audi and Volkswagen’s former dominance. These inexpensive Chinese cars have even displaced German products within Europe, so much so that the EU has charged China with dumping and responded with tariffs, which doubtless will help German manufacturers but only so much.
Trump’s Tariffs Threaten More Disruption
If this were not depressing enough, Trump’s threatened tariffs now loom over all of Europe’s economies, especially the continent’s workshop, Germany. So far, Trump has turned his sights on North America and China. But he is determined to impose reciprocal tariffs on every trading partner, including Europe. He has even described the value-added taxes (VATs) used throughout Europe as well as digital taxes in France and elsewhere on the continent as kinds of tariffs to which the United States will respond. German industry may try to avoid the tariffs by moving facilities to the United States. It has done so in the past, a fact to which German auto plants in South Carolina and Louisiana testify. But that kind of investment, if it will help buffer German firms from Trump’s tariffs, will do little to help Germany’s domestic economy and may even siphon off some of the investments in modernization that would otherwise help the home economy’s competitiveness.
A Grim Forecast for Growth
Against this background, it is easy to see why no prominent forecast calls for much growth in the German economy this year or next. One of the most optimistic is the European Commission, which is hardly surprising given its political bias. Even it sees little real growth—a paltry 0.7% for this year and only slightly over 1% in 2026. The highly respected Kiel Institute sees no real growth this year and barely over 1% in 2026. The official Bundesbank forecast is little different, though the bank’s President Joachim Nagel points out that the Trump tariffs could take as much as 1.5 percentage points off global growth in 2025, which, given the already slight expansion expected for Germany, would create an unprecedented third or fourth year of decline. It is not a pretty picture.
