The powerhouse of Europe, and the third-largest economy in the world, Germany, is facing worrying economic challenges. An export-led nation primarily producing vehicles, machinery, and electrical appliances has ground to a problematic economic halt, seeing consistent negative GDP growth and low levels of productivity. Knowing how Germany has slumped so significantly recently is imperative to ensure history doesn’t repeat itself.
So what is the current economic situation in Germany?
A report from the Federal Statistical Office in Germany highlighted the worrying growth seen in the last several years. Adjusted GDP growth dropped to -0.2%, having sat encouragingly between 2% and 3% up until COVID, which, as expected, shot GDP growth down to -4.1%. One might expect that with stagnant economic growth, inflation would remain at a modest level; this is not the case, however. Since COVID, Germany has experienced a period of low GDP growth and high inflation, with inflation (CPI) reaching 8.8% in November 2022. This could be called minor "stagflation," but this is usually associated with countries such as Argentina, which experienced 20,000% inflation in 1990. Luckily, however, this has fallen to 2.6% at the end of 2024, which is a much more moderate figure.
On top of the GDP and inflation figures, Reuters recently released a projection about Germany’s trade balance, revealing that exports are likely to fall by 0.3% in 2025, while imports are projected to rise by 1.9%. As an export-heavy nation, this isn’t a particularly positive statistic. However, Germany has managed to improve its trade balance since the energy crisis in 2022, which displays the resilience of the economy—seen previously after the financial crisis in 2008, for example.
But what has caused this?
After such consistent and reassuring GDP growth following 2008, what happened? COVID obviously had a major impact on the economy, but it did manage to bounce back the year after, in 2021. Yet, it was in 2022 that this period of poor growth began. During the Russia-Ukraine war, the energy crisis began, shooting gas prices up and hindering progress in Germany’s manufacturing and industrial sectors. These sectors have struggled massively, with the production of EVs being much lower than its competitors, China and America, leading to the country’s projected fall in exports in the coming year.
Very recently, President Trump announced his plans to place tariffs on European goods, which would have further negative effects on Germany’s trade balance. However, perhaps a more positive outlook is that these tariffs and falling competitiveness could stimulate domestic growth and productivity, possibly counteracting this deadlock.
Aside from the country’s exports, Germany also has a rather unfavorable demographic, with around 23% of the total population being 65 or older—a figure that has been rising for the last decade. This possibly contributes to the low levels of productivity seen in recent years. This demographic burden could also be seen as a more structural issue within the economy, lowering workforce participation, placing greater stress on healthcare and pension costs, and ultimately hindering economic progress.
What’s next for Germany?
Despite all this rather worrying information, we have seen Germany bounce back from periods similar to today’s situation. Discussions have begun to address the fiscal constraints on the government by loosening the debt brake—a method used after 2008 to limit how much debt the government can take on—which could hopefully stimulate more investment into research and development sectors of the economy.
To grow the workforce back, Joachim Nagel (President of Deutsche Bank) has called for reforms, including selectively attracting workers from abroad and offering better childcare to encourage more women to join the workforce. These main objectives would be essential for the revival of the German economy. Growing its workforce and subsequently driving the economy forward, an increase in GDP would help the nation take back its title as the "powerhouse of Europe."
