Jens Suedekum: Germany’s stalled growth amid uncertainty

Germany, Europe’s economic powerhouse, is grappling with persistent challenges that threaten its once-robust economy. Despite expectations of a consumption-led recovery bolstered by declining inflation and moderate wage growth, neither consumption nor investment has shown significant improvement recently. The prevailing narrative is one of uncertainty, prompting increased precautionary savings rather than economic activity.

 

Consumption and investment stagnation

Over the past six to nine months, hopes for a recovery have dimmed as German households remain cautious. Nominal wage growth has rebounded to moderate levels, following dramatic declines in real income during the energy crisis of 2022. However, this uptick has not translated into higher consumption. Instead, households and businesses alike are holding back, apprehensive about what lies ahead.

 

This hesitancy stems from a climate of uncertainty. Predictions suggest modest improvements in 2025, but they remain far from guaranteed. A potential downturn looms, with ripple effects that could exacerbate the current mood of economic caution.

 

Germany’s labour market, encompassing approximately 46 million workers, has remained relatively stable due to labour hoarding. This phenomenon, where businesses retain employees despite reduced demand, can only sustain for so long. Major firms, particularly in manufacturing and the automotive sectors, have already announced layoffs. If these trends accelerate, the impact on consumer confidence and spending could be severe.

 

The export engine stalls

Germany’s famed export-driven growth, which underpinned its economic success in the 2000s, is faltering. China, once a key destination for German exports, has become an increasingly challenging market due to political complexities. German car manufacturers, for instance, are struggling to compete with Chinese brands that offer competitive prices and appealing quality.

 

The future of the German automotive industry appears uncertain. Premium brands like Mercedes-Benz and BMW still hold their ground in the luxury segment but face potential challenges from Chinese competitors in the coming years. Volkswagen, however, faces a more immediate existential threat. Its survival depends on developing affordable, high-quality vehicles capable of competing globally, particularly in the electric vehicle (EV) market.

 

Policy uncertainty adds to the woes

Compounding economic challenges is a lack of consistent and reliable policy direction. Recent budget cuts, spurred by a Constitutional Court ruling, have eroded confidence in government initiatives. For instance, the abrupt removal of EV subsidies unsettled the market, creating doubts about the stability of future policies.

 

Germany’s fragmented political landscape exacerbates this issue. While there is broad consensus on the need for reforms—including industrial policy shifts, infrastructure investment, and decarbonization efforts—implementation remains elusive. Even ambitious proposals, such as the Federation of German Industries’ call for a €1.4 trillion "Marshall Plan" to transform the economy, face political roadblocks.

 

Despite these difficulties, Germany retains significant strengths. Its manufacturing sector boasts deep expertise, and advancements in digitalization and artificial intelligence (AI) could offer a much-needed productivity boost. While Germany may lag behind global tech leaders in areas like large language models, there is substantial potential in niche applications of AI and other digital tools.

 

Self-driving cars, for instance, could represent a new frontier for German innovation, provided the country can overcome its current inertia. However, the government’s focus on short-term priorities, such as appeasing pensioners, detracts from long-term investments in transformative technologies.

 

The road ahead

The previous government failed over internal divisions on economic policy. A snap election is on the way, scheduled for February 2025, and it is for the next government to make substantial and far-reaching decisions. Germany stands at a critical juncture. While the country possesses the knowledge and industrial capacity to adapt to changing global dynamics, its ability to do so is hindered by policy uncertainty, political inertia, and external pressures. The next five years will be decisive for key industries, particularly automotive, as they grapple with the challenge of remaining competitive on the global stage.

 

If Germany can overcome these obstacles, embrace digitalization, and implement forward-looking fiscal and industrial policies, it may yet regain its footing. However, without decisive action, the nation risks falling behind as others forge ahead, leaving its economic future increasingly precarious.