Germany, once the engine of Europe’s economic growth, is facing prolonged stagnation. With ten consecutive quarters of flat or declining performance, the outlook remains bleak. Revised GDP forecasts for 2024 and 2025 underscore the need for urgent structural reforms to address deep-rooted challenges in the manufacturing sector and adapt to shifting global dynamics.
Stagnation continues
Germany’s economy shows no signs of recovery as stagnation persists for the tenth consecutive quarter. Recent figures indicate that GDP growth in the third quarter of 2024 remains flat, with no improvement expected in the near term. Consequently, growth projections for 2024 have been adjusted downwards from -0.1% to -0.2%. Forecasts for 2025 also reflect limited growth potential, now reduced to 0.4% from an earlier estimate of 0.8%.
Challenges in manufacturing
Industrial production has been on a downward trajectory since early 2022, with high energy, material, and labor costs squeezing profit margins in the manufacturing sector. Major companies, including Ford, Bosch, and BASF, have scaled back operations and reduced workforce sizes. This is particularly concerning as manufacturing accounts for 20.4% of Germany’s gross value added (GVA), nearly double that of countries like France and Spain.
Service sector compensates for manufacturing decline
Despite challenges in manufacturing, growth in services—especially public sectors such as education and healthcare—has partially offset economic weakness. Public services contribute 19.4% of GVA and achieved 2.5% growth compared to the previous quarter. Other strong-performing sectors include ICT (2.3%) and real estate (1.4%).
External pressures mount
Germany faces additional risks from high electricity costs and rising labor expenses. With energy prices among the highest in Europe, competition from China—where advancements in quality and technology are accelerating—poses a growing challenge.
The USA remains Germany’s most significant export market, but the potential return of protectionist trade policies under Trump presents risks. Blanket tariffs of 10–20% on non-Chinese imports could cause German exports to the U.S. to drop by up to 15%. Even without such measures, Germany’s $83 billion trade deficit with the U.S. could make it a key target for further trade restrictions, impacting industries such as automotive and steel.
Prospects for recovery hinge on structural reforms
While factors such as anticipated interest rate cuts and improved consumer sentiment may offer short-term relief, a meaningful recovery depends on structural reforms. Policy measures such as relaxing the debt brake, increasing investments, and temporarily subsidizing energy prices could help enhance Germany’s industrial competitiveness. Additionally, promoting research and development, as well as strategically supporting the shift toward services, could position Germany for long-term growth.
