Germany, once the shining example of post-war economic recovery, is now facing significant challenges that reflect the shifting realities of the global economy. Following the devastation of World War II, West Germany experienced the Wirtschaftswunder (Economic Miracle), a period of rapid industrial growth and recovery that lifted the country from destruction to become Europe's economic powerhouse. This transformation, fuelled by the 1948 currency reform, tax cuts, and the Marshall Plan, allowed West Germany to rebuild its industries and infrastructure, with policies overseen by Chancellor Konrad Adenauer and his Economics Minister, Ludwig Erhard. Erhard's focus on ordoliberalism, which emphasised free-market principles within a regulated framework, spurred growth and reduced inflation. The boom led to rising living standards, a surge in industrial output, and West Germany’s emergence as one of the world’s strongest economies by the 1950s.
However, in recent years, Germany has seen a dramatic shift. Germany narrowly avoided a recession in the third quarter of 2024, posting a modest 0.2% increase in gross domestic product (GDP), following a 0.3% contraction in the previous quarter. The growth was driven by higher government and household spending, which offered a brief respite from the country's ongoing economic challenges. However, this small uptick does little to change the overall bleak outlook for Europe's largest economy, which continues to grapple with a series of structural and external pressures.
The country’s economic recovery remains fragile. The International Monetary Fund (IMF) predicts zero growth for Germany this year, marking it as the weakest major economy in the world. This stagnation follows a significant downturn in 2023, when Germany experienced its first economic contraction since the onset of the Covid-19 pandemic. Despite the small growth in the third quarter, signs of weakness abound, including persistently low business and consumer confidence. A recent survey by S&P Global and Hamburg Commercial Bank highlighted a steep decline in private sector employment, which reached its lowest level in nearly four and a half years, further signalling the struggles of Germany's economy.
Volkswagen, Germany’s largest manufacturer, has become a glaring example of the country's economic troubles. The company reported a 21% drop in operating profit for the first nine months of 2024, primarily driven by weak sales in China and restructuring costs. Vehicle sales fell by 4%, with particularly poor demand for its traditional internal combustion engine vehicles and mounting competition from Chinese electric vehicle (EV) manufacturers. Volkswagen’s troubles not only reflect broader market shifts but also underscore deeper structural issues within Germany's industrial sector. The automotive industry, the backbone of Germany’s manufacturing sector, is facing immense pressure as it navigates high labour costs, weak productivity, and intense international competition, particularly from China, which is rapidly advancing in the EV market.
Volkswagen’s financial difficulties have led to the possibility of plant closures in Germany, marking a historic shift for the company, which has never closed a domestic plant in its 87-year history. As a result, Volkswagen has warned that it may be forced to cut thousands of jobs in Germany, further compounding the nation’s employment challenges. The company has even proposed reducing employee pay by 10% in an effort to stay competitive, highlighting the strain on Germany’s once-strong manufacturing base.
Germany's reliance on exports, particularly to China, is also under pressure. The Chinese economy, which has been a key driver of German industrial exports, is shifting toward more localised production, reducing its demand for German goods. This has left German manufacturers struggling to maintain their foothold in the world’s second-largest economy, particularly as local Chinese companies gain ground, particularly in the EV sector. As China transitions from a major export partner to a competitor, German manufacturers like Volkswagen are being forced to confront a changing global landscape.
Adding to these concerns, a report by the Federation of German Industries (BDI) suggests that by 2030, up to 20% of Germany’s industrial output could be at risk due to rising energy costs, shrinking global markets, and geopolitical tensions. These challenges, along with Germany’s high labour and energy costs, threaten the country’s competitiveness. An aging population further compounds the problem, as it reduces the pool of skilled workers needed to sustain the economy’s industrial strength.
The BDI report calls for a massive transformation effort to safeguard Germany’s future, requiring an estimated €1.4 trillion investment in areas such as infrastructure, innovation, and green technologies by 2030. However, the German government’s ability to respond to these challenges is limited by constitutional constraints on borrowing and ongoing political fragmentation. With no clear vision or cohesive policy to address these issues, Germany's economic stagnation is likely to continue.
In conclusion, Germany’s economy is facing a period of profound uncertainty. The struggles of Volkswagen highlight deeper issues within the industrial sector, while the shift in global trade dynamics and internal economic pressures only add to the challenges. Without significant reforms and investments, Germany risks losing its competitive edge, and its recovery may be delayed for years. The road ahead looks tough, with no immediate solutions on the horizon.