Germany, once the undisputed economic powerhouse of Europe, is now facing one of the most challenging periods in recent history. The country that has prided itself on a strong export-driven economy, reliable energy sources, and a robust manufacturing sector is witnessing a slowdown that few could have anticipated. This slowdown is not the result of a single factor but the confluence of several deep-seated issues that have been brewing for years.
Over the last six years, Germany has seen virtually no economic growth, a stark contrast to the years of steady expansion that preceded this slump. The German government recently announced that it had revised its 2024 forecast, predicting a contraction of 0.2 percent, a significant shift from the 0.3-percent growth initially expected. This marks the second consecutive year of economic shrinkage for Europe’s largest economy, and while there is optimism for a recovery in 2025, the path to getting there appears treacherous.
Several key elements of Germany’s traditional business model are now defunct. First, the country had long benefitted from cheap energy supplies from Russia, which fuelled its industrial base. But with the war in Ukraine leading to skyrocketing energy costs, that pillar has all but collapsed. Secondly, Germany’s growing exports to China, another major element of its economic success, have started to wane. And thirdly, its reliance on cheap subcontractors in Eastern Europe has become less effective as those economies have grown and labour costs have increased. These three key pillars, which once made Germany a dominant force in the global economy, are no longer as reliable or available.
On top of these structural challenges, Germany is grappling with a demographic crisis. An ageing population is putting immense pressure on the social system, particularly as the workforce shrinks and the number of retirees grows. Germany, like many other advanced economies, faces the difficult task of sustaining its economic output with fewer working-age citizens. This is further complicated by the country’s immigration policies. While controlled immigration could provide a boost to the economy, the current influx has placed a strain on social services and led to political and social tension.
The ripple effects of these issues can be felt across Germany’s vital manufacturing sector, particularly its once-mighty automotive industry. German carmakers, including Volkswagen, BMW, and Mercedes-Benz, are facing tough times as the costs of production rise and competition from Chinese electric vehicle manufacturers intensifies. Volkswagen, Europe’s largest automaker, recently cut its annual outlook and has even mentioned the possibility of closing factories in Germany—something previously unthinkable. BMW and Mercedes-Benz have similarly downgraded their forecasts, citing weaker demand from China, one of their biggest markets.
With domestic demand remaining weak and foreign demand for German goods faltering, the country has found itself in a difficult position. High interest rates, meant to combat inflation, have further stifled growth. The knock-on effects of Russia’s war in Ukraine have not only impacted energy costs but also disrupted supply chains and weighed on the global economy. The manufacturing sector, which has long been the backbone of Germany’s economy, is now struggling under the weight of these combined pressures.
German officials, while acknowledging the difficulties, remain hopeful that a turnaround is on the horizon. The economy ministry expects the economy to recover in 2025, with output forecast to grow by 1.1 percent, rising to 1.6 percent in 2026. The government has also rolled out a “growth initiative” aimed at stimulating the economy. These measures include tax breaks for companies investing in new technologies and infrastructure, a reduction in energy costs for industries, and a plan to cut red tape that has long burdened businesses.
There is also an emphasis on addressing the demographic crisis by incentivising older workers to remain in the workforce and attracting skilled workers from abroad. However, despite these initiatives, business leaders remain sceptical. Peter Adrian, president of the German Chamber of Commerce and Industry (DIHK), welcomed the growth package but warned that it falls short of what is needed to truly revive the economy. He called for more aggressive action to tackle the structural issues facing the country, particularly those related to bureaucracy and high energy costs.
Beyond the immediate economic challenges, Germany must navigate a rapidly changing global landscape. The growing geopolitical tensions between China and the United States have left Europe, and Germany in particular, in a precarious position. As a major exporter, Germany relies on stable global trade relationships, but with these two economic superpowers locked in competition, Germany’s place in the world economy is becoming more uncertain.
Germany’s challenges are not insurmountable, but the solutions will require bold action and significant reform. The traditional business model that served Germany so well for decades is no longer viable in today’s global economy. The country must find new ways to compete, innovate, and grow in a world that is increasingly fragmented and volatile. Whether it can do so will determine not only its own future but the future of the eurozone as well, given Germany’s outsized role in the European economy.
In the midst of these economic difficulties, there are signs of hope. Wages are expected to rise, inflation is projected to ease, and interest rates are likely to fall, all of which could help stimulate domestic demand. Meanwhile, a stronger global economy should provide a boost to German exports and industrial investments, which remain a key driver of growth.
However, for these improvements to take hold, the German government will need to fully implement its growth initiative and address the concerns of the business community. Reducing the bureaucratic burden on businesses, making energy more affordable, and fostering innovation in sectors like green energy and technology will be critical to Germany’s future success. If the country can rise to the occasion, there is hope that it can once again regain its position as a leader in the global economy.
