Insight Investment

We consider why the German economy has struggled since the pandemic, and why the February 2025 election presents an opportunity for change.

• Manufacturing malaise: Germany has been experiencing a period of industrial malaise since the pandemic, particularly in the key manufacturing areas of automotives and machinery. This has led to a decline in industrial production and retail sales, with GDP flatlining.
  
  
• Structural headwinds to German growth: The German economy faces significant structural headwinds. These include external factors such as its loss of international competitiveness and the fragmentation of global trade, and internal factors such as weak internal demand and fiscal rigidity.
  
  – Competitiveness erosion: Germany’s international competitiveness has been eroded due to high energy and labor costs, and an ageing population means its labor force will decline longer term unless this is offset by higher immigration, which could bring its own challenges.
  
  – Global trade fragmentation: Germany exports substantial amounts to the US and China, with both trade relationships under pressure. The US is expected to introduce sizeable tariffs under President Trump, and China is both less reliant on German exports and increasingly competitive in Germany’s key manufacturing areas.
  
  – Weak internal demand: Germany’s economy is affected by weak internal demand. Despite falling inflation and growing real wages, consumer confidence remains weak, and investment is stagnant.
  
  – Fiscal rigidity: Germany’s net borrowing and net debt levels are much lower than comparable peers, but the country’s ‘debt brake’ – a limit on borrowing set in law – prevent a meaningful increase in public expenditure to offset other pressures.
  
  
• Possibility of change: A German election is on the horizon in February 2025, and this presents an opportunity for Germany to address its economic challenges. A likely coalition between the CDU/CSU and SPD means there is a chance for debt brake reform, increased defence spending, and an overhaul of energy and industrial policy.