FRANCE – For decades after WWII, Germany became the industrial engine of Europe. It remained that way until two years ago. Then, its economy slumped and, after that, went dormant.
Once by far the most vibrant of any inside Europe, it peaked in the third quarter of 2022 with an inflation-adjusted output of $954 billion for the three-month period. “You have an economy in Germany that is sick,” says Elias Haddad, a senior markets strategist at Brown Brother Harriman in London.
Two major economic issues are the problem. First was Germany’s long-term reliance on cheap energy (oil and natural gas) from Russia, which once fueled its industrial heartland. When the Russians invaded Ukraine and the West sanctioned imports of Russian energy, little was left in Germany’s energy structure.
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“It had already shut down many of its nuclear power stations and then closed the rest during 2022 and 2023,” says Daniel Lacalle, chief economist at Madrid-based investment company Tressis. “A lot of times we hear about Germany as a country that is very logical and organized, but this was done in the middle of a full-swing energy crisis.”
The result of the lack of cheap energy has upended the manufacturing sector, which has been in contraction since mid-2022, according to the HCOB manufacturing PMI, which measures the sector’s health.
In addition to the energy issue, Germany now finds its exports in direct competition with China “China is competing on capital and investment goods in which Germany produces,” says Felix Huefner, chief German economist at UBS investment bank in Frankfurt. “It means fewer exports to China and more competition in third markets.” That is particularly true when it comes to the sale of automobiles. And, of course, any large-scale competition in that area hurts Germany’s export-led economy.
As if an energy problem and competing with China weren’t big enough issues, Huefner also notes that the German economy is set to hit other headwinds. In particular, the country faces a fiscal squeeze due to rules and laws enacted after 2009 to restrain government deficit spending. Since 2020, the country has had an annual back-to-back deficit as high as 4.3% of GDP.
The debt brake is designed to avert structural indebtedness for the country, and now the government has to tighten its financial belt. “We estimate fiscal tightening is 20% of growth a year,” Huefner says. “For an economy in the new normal, the German potential growth rates are probably between 0.7 and 0.8% annually.” That’s relatively low for the country by historical standards.
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While the economy seems stuck, the political situation has recently seen some tumult, which has the potential to hurt business as well. Earlier this month, Germany’s Chancellor Olaf Scholz fired the finance chief, Christian Linder. The move pushed the three-party coalition into difficulty, and now an election has been called for February 23, 2025.
“It is by no means ensured that it will be a particularly stable two- or three-party coalition,” says Jan Techau, Eurasia Group’s director of Europe, Berlin. “There is a fair chance we will get another wobbly government again.”
Tesla CEO Elon Musk, responding on X, called Scholz a fool, saying in German, “Olaf ist ein Narr.”
Musk, who has become what some consider President-elect Donald Trump’s closest adviser, is helping shape smaller government and free markets.
Finally, there is the threat of blanket U.S. tariffs across the globe, including Germany, when Trump takes office near the end of January. That is particularly worrying because the U.S. is Germany’s largest trade partner, constituting 9.5% of the total in 2022, data shows.
One factor that remains vague is whether the calls for tariffs are merely a negotiating tactic or meant as a policy promise. “It’s extremely hard to know what Trump will do,” says Leo Barincou, a senior economist at Oxford Economics in Paris. “If the most extreme crazy stuff gets done, then that would be really bad,” he says.
However, limited tariffs on selected products, such as cars, chemicals and agricultural products, may not be too much of a problem, Barincou says. A rising dollar, and hence a falling value of the euro, would offset some of the harm caused by the tariffs. “At a macro level, the impact would be limited,” he says.
Despite the country’s troubles, Germany’s stock market is up 13% this year, as tracked by iShares MSCI Germany ETF.
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