Even if Germany finally starts to grow again in 2024, it will struggle to shake off the depression lurking behind one of its weakest annual performances in a generation.
Plagued by energy problems and creaking infrastructure, hit by a slowdown in global demand, and lagging in the race for electric vehicle dominance, the country was likely in a recession as it ended in 2023.
The attempt by the coalition government to reallocate €60 billion of unused pandemic-related funds to climate spending was deemed unconstitutional in November, forcing ministers to agree on emergency budget cuts, including subsidies for electric vehicles. The economy is expected to more or less stagnate for a second year. At the same time, the court ruling has triggered weeks of debate on how to reconcile the country’s obsession with budget balance and the need to transform its physical and digital infrastructure. This situation stems from a decision made in 2009 to amend its Basic Law to include a debt brake, a strict provision that government net borrowing must not exceed 0.35% of GDP.
Germany must quickly wean itself off hydrocarbons, predominantly Russian, rebuild its military, and repair its crumbling infrastructure; endless train delays have become a national embarrassment. The level of education has also declined: last year’s results in mathematics, reading, and science by 15-year-old Germans were the worst ever recorded by the Programme for International Student Assessment (PISA).
While industrial data for the coming week is expected to show a slight improvement from its lowest level in three years, with the government in a straitjacket to accelerate investments and the threat of train strikes looming, few economists anticipate a genuine recovery. A nation that has long considered the eurozone’s engine is struggling to find a new lease of life.
A combination of cyclical and structural pressures is currently thwarting hopes that the country can untangle its knot and return to its previous growth rates. Factory orders in October were close to the lowest level since mid-2020. Unfortunately, the figures expected this week are unlikely to change the situation.
The country is grappling with a gas supply crisis following Russia’s invasion of Ukraine, which has not yet been resolved sustainably and will persist in any case. Even in the unlikely event of normalization with Russia, Germany will compete with China. Indeed, a new pipeline with the capacity of North Stream 2 will connect Russia to China at the end of this year. Transitional measures could not offset Chancellor Olaf Scholz’s suicidal stance on the Ukrainian issue. The latest failure, the German Supreme Court’s condemnation of off-balance-sheet special purpose vehicles, is a perfect example. Since then, ministers have patched up revised budgets for 2023 and 2024, but the biggest question of how to reequip the economy to compensate for years of underinvestment is still not resolved as the government grapples with a borrowing limit enshrined in the Constitution that requires budgets close to balance.
The economic malaise in Germany is palpable and seems to have no remedy.
The transition to a climate-neutral country and the numerous investments that must be made before they can generate income also add to the uncertainty. Germany’s industrial jewel, the automotive sector, needs to catch up. At a time when the Chinese company BYD surpassed Tesla as the world’s largest electric vehicle manufacturer, the VDA automotive lobby stated that German car production last year was still 12% below 2019 levels. Scholz’s political challenge is exacerbated by the potential for increasingly long train strikes, angry farmers protesting subsidy cuts, and the rise of the far-right Alternative for Germany, which will likely make gains in this year’s regional elections in its eastern strongholds.
In this context, the Bundesbank is forecasting overall growth of only 0.4% this year. It would be an improvement from 2023, but it would still be one of the weakest outcomes of this century, in tandem with inflation, which officials say will remain high.