Economists warn that Germany's slow transition to new industries like AI and renewable energy limits its ability to offset declines in traditional sectors.
BERLIN, Oct. 17 (Xinhua) -- Germany, once seen as the economic powerhouse of Europe, is grappling with a second consecutive year of economic contraction, raising concerns about its future growth prospects.
The German government's latest autumn forecast predicts a 0.2-percent decline in GDP for 2024, following a similar downturn in 2023, making it the only developed economy with negative growth last year.
Experts attributed the economic downturn to a combination of conservative public investment, an over-reliance on manufacturing and exports, and external shocks like the Russia-Ukraine conflict. These factors suggest that Germany may struggle to regain its former economic strength in the short term.
"ENGINE" SLOWS DOWN
Over two decades ago, Germany was dubbed as the "sick man of Europe" due to its sluggish economy. However, the country rebounded, establishing itself as Europe's economic engine, particularly after the 2008 global financial crisis. Today, though, signs of a relapse are emerging.
Following a contraction in 2023, the German government's latest economic report, released on Oct. 9, has lowered the GDP growth forecast for 2024 from a projected 0.3-percent increase to a 0.2-percent decline, indicating a second consecutive year of recession.
This downturn has been fueled by high inflation, elevated interest rates, and weak export demand. As an export-oriented economy, Germany has been particularly vulnerable to fluctuations in global demand, leading to declines in industrial output, factory orders, and exports in the second quarter of this year.
Economic pressures are taking a toll on businesses. German credit agency Creditreform reported that approximately 11,000 companies filed for bankruptcy in the first half of 2024, a nearly 30-percent increase from the previous year to reach the highest level since 2016.
Larger firms have also announced job cuts. Volkswagen announced potential layoffs and the closure of some of its German plants, while ZF Group, an auto parts manufacturer, plans to reduce its workforce by 11,000 and 14,000 jobs by 2028. Continental, a major player in the transportation sector, is also looking to reduce its workforce by 7,150.
INTERNAL CONSTRAINTS
Experts cite bureaucratic inefficiencies as a significant obstacle to Germany's economic growth, noting that establishing a new business in the country takes at least 120 days -- double the average time across OECD nations.
Insufficient infrastructure investment further complicates the situation. Germany's aging railways, deteriorating highways, and slow internet speeds undermine its reputation as a global economic leader. Public investment as a share of GDP has consistently fallen below the EU average for years.
During former Chancellor Angela Merkel's administration, spending on infrastructure such as roads and railways averaged just 0.65 percent of GDP, resulting in delays in essential repairs. As of June, only 52.5 percent of trains were on time, a record low.
The country's digital infrastructure also lags behind. Data from Statista reveals that just 4.2 million Germans have access to fiber optic internet, equating to a mere 17.7-percent coverage rate. Furthermore, the EU's Digital Economy and Society Index ranks Germany below the EU average regarding digital skills, corporate digitization, and digital public services.
Political disagreements within the German coalition government have exacerbated the challenges, hindering progress on key policies, including the 2025 federal budget. While the Social Democrats (SPD) and the Greens advocate for increased spending on green transition initiatives and infrastructure, the Free Democratic Party insists on strict adherence to constitutional debt limits, resulting in protracted negotiations.
EXTERNAL FACTORS
Germany's economic success has long been tied to its manufacturing sector, with industries such as automotive, machinery, electronics, and chemicals contributing to 19 percent of GDP -- double the share in Britain and France. However, this heavy reliance on traditional industries has exposed Germany to disruptions in global supply chains, particularly after the COVID-19 pandemic and the Russia-Ukraine conflict.
Economists warn that Germany's slow transition to new industries like AI and renewable energy limits its ability to offset declines in traditional sectors. The U.S. Inflation Reduction Act, which provides substantial subsidies for green technologies, has attracted investments away from Germany, with Tesla shifting plans for a battery plant from Germany back to the United States.
"Germany's economy is built on manufacturing, and if deindustrialization continues, it could have serious long-term impacts," said Zheng Chunrong, director of the Center for German Studies at Tongji University.
CHALLENGES AHEAD
Germany's economic difficulties stem from a mix of internal and external factors, including both short-term disruptions and longer-term structural issues. The IMF forecasts that Germany's growth will lag behind that of the United States, Britain, and France over the next five years.
German Chancellor Olaf Scholz has announced his intention to seek re-election next year. However, in the European Parliament elections held in June, his SPD party suffered significant losses to opposition parties, with critics attributing the defeat to widespread dissatisfaction with the government's management of economic challenges.
In July, the Scholz government announced a draft budget for 2025, along with 49 measures aimed at stimulating growth. These measures include incentives for investment, reducing bureaucracy, and enhancing energy infrastructure.
The proposed measures include an extension of the accelerated depreciation rule for businesses through 2028, with increased maximum deductions and new tax incentives for overtime work. The budget aims to boost federal investment spending, allocating a record 57 billion euros (62.13 billion U.S. dollars) for 2025. Additionally, R&D subsidies will be raised, with large companies eligible for up to 3 million euros (3.09 million dollars) and small and medium-sized enterprises (SMEs) receiving up to 4.2 million euros (4.58 million dollars).
Yet, experts warn that limited fiscal space may constrain the impact of these measures. "High energy costs, excessive regulation, aging infrastructure, and shortages of skilled workers and raw materials are all contributing to Germany's economic malaise," said Zheng. "It remains uncertain whether Germany can keep pace with the United States and emerging markets."■