German economy falters amid political unrest at home and abroad

By Bahattin Gonultas

BERLIN (AA) - Germany’s economic growth is hindered by insufficient public investment, bureaucratic hurdles, and high location costs, which have caused stagnation and left the country lagging behind in Europe and globally amid both domestic and international political unrest.

Germany’s growth model traditionally relied on globalization and affordable energy to boost wages and living standards. But this model now faces structural challenges and geopolitical risks.

As protectionism rises globally and the Russia-Ukraine war drives up energy prices, Germany’s real gross domestic product (GDP) has struggled, ranking the lowest among G7 nations since the coronavirus pandemic. The economy continues to grapple with dependence on the US and China for trade, high energy costs, insufficient investment, and unfavorable demographics.

The global economic slowdown has hit Germany hard, as its export-driven industry – accounting for 30% of its GDP – faces increased competition from China and rising energy costs due to the Ukraine war.

With eurozone inflation spurring interest rate hikes, German firms are pulling back on investments, while nations like China and Türkiye increasingly produce goods they once imported from Germany, further straining Germany’s industrial growth.

Germany’s reliance on cheap subcontractors in Eastern Europe, defense outsourcing from the US, and importing low-cost energy and intermediate goods to label as “Made in Germany” no longer sustains the economy.

The German economy narrowly avoided a technical recession, growing 0.2% in the third quarter after two consecutive quarters of contraction. Last year, it shrank 0.3% year-on-year due to high inflation, energy costs, and interest rates.

The government now projects a 0.2% economic contraction this year. If this happens, Germany will be the only G7 nation facing a recession.

German exports are also on a downtrend, dropping 1.7% month-on-month in September due to shrinking Chinese demand, according to Germany's Federal Statistical Office (Destatis). Manufacturing also fell 2.5% in the same period, spotlighting automotive sector weaknesses.

Stagnant global growth, geopolitical tensions, China’s ascent, and consumer inflation sensitivity weigh on Germany’s imports, say analysts.

With China’s capacity to produce more independently, Germany’s economic growth remains subdued.

Nils Jannsen, a senior researcher at the Kiel Institute for the World Economy, said that Germany has been stagnant since early 2022.

The ifo Institute also reported that 41.5% of German firms cited a lack of orders in October – the highest rate since the 2009 financial crisis, even surpassing pandemic levels. Notably, 47.7% of manufacturing firms and 68.3% of metal production companies reported order shortages.

- Trump’s victory and potential impact on German economy

Last week Republican Donald Trump was elected the next US president, pledging to raise tariffs and reduce trade deficits while encouraging domestic production.

Trump, age 78, is set to take office in January as Germany anticipates its first early elections in nearly two decades the following month.

Trump’s plan to impose a 10% or higher tariff on all European Union goods exported to the United States could spell trouble for Germany, which counts the US as its largest goods market.

Germany exported around 400,000 cars to the US last year, according to the German Association of the Automotive Industry (VDA), and the US was Germany’s largest car buyer in the first half of this year. Analysts warn that Trump’s tariffs and protectionist policies on EU imports do not bode well for Germany.

- German auto sector sentiment at its lowest in over 2 years

Business sentiment in Germany’s automotive sector in October fell 4.3 points to minus 27.7, the lowest since the Ukraine war’s onset in February 2022, according to an ifo Institute survey. Automakers and suppliers continue to feel the fallout from the conflict, now approaching its third year.

The European auto sector faces challenges including high production costs from rising electricity prices, falling demand, and mounting competition from China.

Volkswagen, Europe’s largest automaker, is planning factory closures and layoffs in Germany for the first time due to high production costs, while German industrial supplier the Schaeffler Group announced 4,700 job cuts in Europe, including 2,800 in Germany. Meanwhile, Volkswagen and BMW sales in China dropped and Mercedes-Benz issued a profit warning.

- Governing coalition collapses, spurring early elections

Germany’s ruling coalition collapsed this month following disputes over climate targets, state election losses, and economic struggles. Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner last Wednesday. Scholz is expected to ask for a vote of confidence on his government on Dec. 16, with parliamentary elections scheduled for as early as February.

The Free Democratic Party (FDP) withdrew its Cabinet ministers, leading to the coalition’s dissolution.

Disagreements within Germany’s ruling coalition on economic and social policies have delayed critical decisions, highlighting the challenges posed by complex bureaucratic structures and low public investment – further fueling concerns over Germany’s stagnating growth.

Amid structural challenges, high energy and employment costs, tax burdens and geopolitical uncertainty, experts say Germany’s economy is at a standstill.

*Writing by Emir Yildirim in Istanbul