Germany’s economy is dying. Here’s why and what happens next

German Finance Minister Christian Lindner, injecting some humor at the recent World Economic Forum in Davos, stated that Germany is not the “sick man” of Europe but rather “a tired man,” following the recent years of crisis, in need of a “good cup of coffee.”

However, the economic indicators point to something more than fatigue. Although Germany could be described as merely being in a mild recession – the GDP readings, after all, can hardly be called awful – in reality the economy finds itself in the uneasy place of having no clear prospects for an imminent recovery. 

Economic figures paint a darkening picture

Initial estimates suggest a 0.3% decline in GDP in 2023, positioning Germany as the only major industrialized nation in the red. Germany’s national debt saw an increase of about €48 billion, reaching almost €2.6 trillion. While this may appear alarming at first glance, it’s crucial to consider the broader economic context. Germany’s debt-to-GDP ratio, standing at approximately 65%, is relatively favorable compared to many Western countries. 

Moreover, Germany has implemented strict limits on deficits, demonstrating a commitment to financial prudence. In light of these measures, there is a counterargument that Germany could potentially consider taking on more debt.

Sentiment among businesses deteriorated further at the beginning of the year, as illustrated by the ifo Business Climate Index in January, which fell to 85.2 points. Both the current situation and expectations for the coming months were evaluated more pessimistically. The ifo Institute has reduced its growth forecast for 2024 to 0.7%, compared to the previously predicted 0.9%. This downgrade is partially attributable to additional cuts in the federal budget, which became necessary due to a ruling by the Federal Constitutional Court that prohibited leftover Covid-stimulus funds from being repurposed.

Deindustrialization in Germany: A growing concern

The German economy is on the brink of a crisis as deindustrialization firmly takes root. Companies, driven by economic considerations, are increasingly relocating their production overseas, posing a significant threat to a nation heavily reliant on industrial output. This trend has immediate and profound consequences that extend beyond the evident impact on industrial sectors. The offshoring of production could entail a surge in layoffs, further aggravating the economic challenges faced by the workforce.

READ MORE: Loss of Russian gas has hurt German economy – minister  

In November 2023, according to preliminary data from the Federal Statistical Office (Destatis), German exports experienced a decline of 5.0% year-on-year, while imports recorded a notable decrease of 12.2%.

While the primary focus is on the industrial landscape, it is crucial to acknowledge the interconnectedness of these shifts. A case in point is the German chemical industry, which finds itself in a deep and prolonged downturn, having lost approximately 23% of its production capacity. Furthermore, leading managers have expressed considerable skepticism about a swift recovery. The challenges are exacerbated by Germany’s struggle with high energy costs, particularly affecting industries engaged in global competition. Despite government attempts to counteract these challenges, such as a billion-dollar electricity price package, success has been limited.

Meanwhile, according to a report by Deloitte, an alarming two out of three German companies have partially relocated their operations abroad due to the country’s ongoing energy crisis. This trend is particularly pronounced in critical sectors, such as mechanical engineering, industrial goods, and automotive industries, where 69% of companies have relocated their operations to a moderate or large extent.

Key findings from the Deloitte report shed light on the reasons behind this significant shift. Most businesses attribute their decisions to move operations overseas to the combination of high energy prices and inflation. Notably, companies in these industries are planning to relocate not only low-skilled component production but also, to a lesser extent, high-skilled production processes.

Germany’s attempts to shift toward green energy agenda have also contributed to the rise in electricity prices, further aggravating the situation. Deloitte partner Florian Ploner warns of widespread deindustrialization occurring on a significant scale, with the potential for more companies to follow suit if electricity prices remain high. The bleak outlook for Germany is compounded by skepticism among companies about the government’s ability to address their concerns. Despite companies saying that increased subsidies and reduced bureaucracy would encourage them to stay, there is little confidence that the current government will take the necessary actions to prevent further departures. 

Contrasting trajectories: US thrives while Germany struggles amid sanctions impact

As 2024 unfolds, a striking disparity in the economic trajectories of the US and Germany becomes evident. While the US has been surpassing expectations, Germany, entangled in the repercussions of Russian sanctions, faces a precarious descent into recession.

The resilience of the US economy is evident in the final quarter of 2023, which saw a growth rate of 3.3%, a performance that surpassed economists’ projections. Notably, inflation in the US has receded from its peak of 9% in June 2022 to a more manageable 3.4%.

In stark contrast, Germany stands at a critical crossroads. The situation is further complicated by warnings of a politically motivated shift, particularly towards green energy, posing additional hurdles for major companies and casting a shadow over the nation’s economic landscape. The reluctance of the German government to acknowledge the true costs of its industry, coupled with the decision to abandon Russian gas, appears to be a misstep that has inadvertently weakened its economic standing.

READ MORE: Germany’s economic downturn sees carbon emissions drop to 70-year low – report

The reality now unfolds: the US economy emerges stronger, while Germany, adhering to the Washington agenda and bearing the brunt of Russia sanctions, faces the consequences of an erroneous course.

A significant aspect of Germany’s predicament lies in its steadfast alignment with the Washington agenda and the consequential impact of Russia sanctions. The sanctions have placed a considerable burden on Germany’s economic machinery while serving no national interest. Industries, especially those with strong ties to Russian markets, find themselves grappling with disrupted supply chains, reduced exports, and heightened uncertainty.

This alignment with Washington has exposed Germany to economic vulnerabilities that will not be easy to overcome. Recessions come and go, but what Germany is confronting is deeper than a mere downturn: the underpinnings of its prosperity have been ripped out, while there is no quick fix to restructure the economy.