The German Economy in a Long-Term Slump
The German economy encounters a contraction towards the end of 2024.
The German economy is currently grappling with its longest stint in a recession in over two decades. According to the Federal Statistical Office, the nation's GDP dipped in the fourth quarter of 2024, and the outlook for 2025 is far from optimistic.
Exports and production in the automotive and machinery sectors have taken a significant hit, leading to a 0.2% decrease in GDP compared to the previous quarter. Despite an increase in consumer and state spending towards the end of 2024, this sector continues to struggle. Exports, specifically, plummeted by 2.2% in the same period, reflecting a trend that hasn't been seen since the second quarter of 2020.
Investments in equipment, including machinery and vehicles, are also on a downward spiral, recording a fifth straight decline. Meanwhile, construction investments are showing signs of improvement due to favorable weather. Despite these silver linings, the German manufacturing sector, including the automotive and machinery sectors, continues to see a decline.
The construction sector, too, is facing its fair share of challenges, with its economic performance registering a further decline. The German economy's ongoing recession is putting pressure on the future ruling government, with economic associations advocating for lower energy prices, taxes, and a reduction in bureaucracy as potential solutions.
Understanding the Recession Crisis
In light of recent data, various factors have contributed to Germany's economic downturn. These include:
- Low Productivity Growth. Traditional industries like automotive and mechanical engineering have played a significant role in stagnating productivity growth in the German economy.
- High Energy Costs. The high costs of industrial electricity have impacted energy-intensive sectors, causing concerns.
- Overregulation and Bureaucracy. Excessive bureaucracy costs the German economy €146 billion annually. This hampers investments and business operations.
- Labor Costs and Demographic Challenges. High labor costs and an aging population with a shortage of skilled workers pose challenges to businesses.
- Energy Crisis and Sanctions. The ongoing energy crisis and sanctions against Russia have led to a surge in energy prices and a reliance on more expensive alternatives like LNG.
- Economic Policy Conditions. Companies have identified economic policy conditions as a major risk, with concerns over taxes, labor costs, and domestic demand.
To overcome these challenges, potential solutions include investing in innovation, energy diversification, regulatory reforms, labor market reforms, economic policy adjustments, and normalizing international trade.
[1] Source: Various economists and analysts.[2] Source: German Economic Institute (IW) and the German Chamber of Commerce and Industry (DIHK).[3] Source: European Energy Agency (EU) and German Energy Agency (dena).
Other industries beyond automotive and machinery are also experiencing difficulties due to the ongoing recession, with exports facing a downturn. The fourth quarter of 2025 in Wiesbaden saw unseasonably harsh weather, which surprisingly boosted construction investments. However, the nation's recession continues to put political pressure on the future ruling government, with economic associations advocating for policy changes such as lower energy prices and reduced bureaucracy.