Eternal stagnation: German economy falls for the second year in a row
The crisis in the German economy turned out to be more protracted than one might expect: the country's GDP shrank for the second year in a row. This has only happened once before. But recession or, at least, stagnation is registered in many areas at once - from deindustrialization to the state of the housing market, i.e. there is no easy way out of the situation. The only thing that could stabilize the economy relatively quickly is the restoration of trade with Russia, primarily in energy resources. Details about the recession in Germany and the prospects of the largest West European economy - in the material of "Izvestia".
We did not come out of the pandemic
If we take the post-war history, the last and only time difficulties of this magnitude in Germany occurred in 2002-2003. The cyclical crisis associated with the consequences of financial turmoil in Asia and North America at the turn of the century led to a decline in GDP for two consecutive years. Then it was possible to get out of it thanks to Gerhard Schröder's reforms, which had an effect in the middle of the noughties. Liberalization of legislation, a bet on increasing export capacity, fiscal moderation - all this led to the fact that Germany became the locomotive of European economic growth.
We should not forget that at first the national economy benefited from the euro and, of course, the expansion of energy cooperation with Russia. Oil, coal, and above all gas were flowing from Russia to Germany in increasing volumes, fueling growth. While the south of Europe was suffering from a severe debt crisis, the Federal Republic of Germany was not experiencing serious difficulties.
Former German Chancellor Gerhard Schröder
Now it is a repeat of that situation. In 2023, the country's GDP fell by 0.3%, and last year it fell by 0.2%. Interestingly, at the beginning of the year, it was predicted that the recession in Germany would be short, and in 2024 it would return to the upward trajectory. But the crisis did not disappear in industry: business activity indicators remained at a negative level until the end of the year, never exceeding even 45 points (a figure above 50 means an increase in activity, below - a decline). In principle, things were not going well across Europe, but the downturn was most accentuated in Germany.
Overall, the post-pandemic recovery in the FRG did not set well. Germany experienced a relatively mild recession in 2020 (-3.7%, by comparison France's GDP fell by almost 8%), but there was no rebound. GDP grew by 2.6% in 2021 and 1.4% in 2022, while in most European countries the numbers were at 5-7% in those years.
At the beginning of 2024, we could state that the country's GDP was unchanged from 2019 - a result in modern history generally very rare for any state. Unless Greece, which fell into de facto default in the 2010s, had a longer period of stagnation. Now we can say that Europe's largest economy has degenerated. And the recession of the early "noughties" on this background looks not serious at all.
But its problems began even before the pandemic. 2017 was a peak year for German industry. It should be noted at once that Germany can only be called a partially post-industrial country (just like, for example, Japan or China): its share of industrial production in the early 2020s was almost 30%. The US, by comparison, is more than 10 percentage points less.
If we look at labor productivity indicators, things are even worse. There has been no growth in this indicator since 2015. While this is a common problem for developed economies these days, in Germany technological stagnation (and it is technological progress that can be the only source of productivity growth in the long term) has become a real scourge.
The digitalization of the economy is, if not a failure, extremely slow. In terms of internet speed, the Federal Republic of Germany loses out to many Eastern European countries, such as Poland, Romania or Slovakia, and is only marginally surpassed by a relatively underdeveloped country like Moldova. Let alone developed neighbors like France or Denmark.
At the same time, Germany is in the best geographical position in terms of Internetization: the country is evenly and densely populated, so there should be no special problems in paying off the pulling of cables to remote towns and villages. There are almost no large Internet companies in Germany, and Berlin, which is supposed to be a leader in terms of IT development and the "creative class" in general, is still a relatively poor city (there are not many capitals in Europe where GDP per capita is less than the national average).
Analog crisis
Thus, Germany's main economic strength remains traditional, "analog", industry. Chemical industry, tool making, mechanical engineering, automobile manufacturing and a host of other industries.
The quality of German products has always been widely known - at least since the beginning of the 20th century they enjoyed the highest reputation. The price, although relatively high, was usually justified. But it was she who fell victim to the energy crisis of the early first half of the 2020s. The conflict in Ukraine and radical sanctions against Russia, the country's strategic trading partner, caused gas and other fuel prices to soar several times. At the same time, for many German industries (primarily the chemical industry), the cost of gas accounts for several tens of percent of production costs. During 2023-2024, hundreds of companies closed down or drastically reduced production.
The automobile industry, the flagship of the German economy, is not as dependent on gas and coal prices. More so on oil prices, but here the pain from the rupture was not as great. However, two other problems arose. First, the Green Party, which gained representation in Olaf Scholz's government, pushed through various restrictive programs to force a switch to electric cars by the 2030s. This has had an extremely negative impact on investment programs and, in general, on the confidence in the future of German corporations.
Meanwhile, in the field of electric car production, difficulties have arisen in terms of competition with Chinese manufacturers like BYD. Traditional competitive advantages, as in the construction of cars with internal combustion engines, they did not have, and to fight with the Chinese, who are far ahead of them in the "economy of scale", it was incredibly difficult. The result is obvious: Volkswagen, for example, will reduce its workforce by 35,000 people by 2030, and car production will decrease by about 730,000 units.
Only the debt is good
There are also more general problems of the national economy. Investments in the FRG from the EU have almost stopped growing. The situation is slightly better for investments from outside the bloc, but in general, even in France (we do not even mention the leading world powers like the US and China) invest more and more actively. Since 2015, two large waves of refugees have poured into Germany: the first from Syria and the Middle East and Africa in general, and the second from Ukraine. But neither of them has solved the country's labor shortage. More than half of refugees and other forced migrants remain outside the official economy and are a burden on it.
As for those German residents who have full-time jobs, the figures are not good either. The average German works about 1,350 hours a year, one of the worst results across the OECD (the U.S., by comparison, has about 2,000 hours, about the same in Russia). In theory, these people could work more, but in this situation it is not at all certain that they will find somewhere to apply their labor.
One of the few bright spots in Germany is the low level of national debt. The tight fiscal policies of this and past governments, as well as conservative courts that constantly block the expansion of government spending, have kept the national debt below 70%. This is far less than in almost any country in Europe (in Britain and France, 100% has become the norm, and in Italy the level tops 130%). This is quite a wide space for fiscal maneuvering. But this fiscal reserve can also be spent without much impact, only stoking inflation, unless major reforms are undertaken.
All in all, Germany is facing a host of problems on so many fronts that there is simply no good single solution for Germany right now. Nevertheless, some of the negative consequences can be overcome as quickly as possible without taking any painful or unpopular steps. Restoring ties with Russia and obtaining fuel from the eastern shores of the Baltic would quickly reduce costs for German companies by percentages, and in some areas by tens of percent. That would immediately return the economy to growth, albeit modest. It is no coincidence that at the last congress of the Alternative for Germany party, one of its leaders, Alice Weidel, promised to restart Nord Stream, which drew a standing ovation.
