Germany: waiting for a new direction

Germany is having a difficult time. The problems have been brewing for some years; have come to a head recently; but are unlikely to be solved quickly.

First, growth is non-existent. GDP dipped by 0.2 per cent last year after a decline of 0.3 per cent in the previous year. Growth of less than 1% in 2025 seems likely. We see long-term potential growth (driven by demographics and productivity) at around the same 1% rate. The auto sector is struggling to compete in the rapidly evolving EV market. Weakness in the Chinese economy and disruption to energy imports because of the Russia-Ukraine war are weighing on the industrial sector. Domestic confidence and consumption are subdued.

Christian Linder, the finance minister from the (liberal) FDP element of the former coalition government, after insisting on fiscal rectitude, resigned in October, triggering a broader political breakdown.

Germany has had similar problems in the past, notably in the early 2000s. That was overcome with a series of 'Harz' reforms, helping to improve the supply side of the economy. Now, with a general election in February 2025 and a likely long process of coalition formation, meaningful reform will have to wait.