Germany: the locomotive of Europe no longer runs

Germany, the only country in Europe, sinks into recession for the second consecutive year, with one GDP contraction in 2024 of 0.2%in line with government and expert forecasts, and after the 0.3% drop in 2023, when the increase in energy costs following the Russian invasion of Ukraine had the main impact.
The recession of 2024 was particularly affected by the profound industrial crisis which hit the largest European economy, starting from the automotive sector. Just think of Volkswagen, which will cut 35,000 jobs in Germany by 2030 and reduce its production.

To complicate matters, the political uncertainty in which the locomotive of Europe is navigating, which on February 23rd will be grappling with the early political elections and that it will likely undergo several months of negotiations before forming a new government.

According to several analysts, a rapid recovery is not on the horizon for the Eurozone’s engine. “Everything suggests that the 2025 will be the third consecutive year of recessione,” says Jens-Oliver Niklasch of the German bank Lbbw.

Among the reasons for this impasse is certainly the prospect of a trade war with Donald Trump’s United States, the main outlet for German exports.

A double-dip recession hasn’t occurred in Germany since the early 2000s, when the country, weakened by the costs of reunification, was nicknamed “the sick man of Europe.” As in the past, the economic difficulties overlap with structural problems: German industry has not recovered from the increase in energy costs and is suffering from the reduction of its commercial outlet in China.

Added to this are the costs of decarbonisation of the economy, demographic aging, the burden of bureaucracy and obsolete infrastructure. “The German economy is going through biggest post-war crisis. The pandemic, the energy crisis and inflation have impoverished the Germans,” Bert Rurup, president of the research institute of the Handelsblatt newspaper, declared in December.

This crisis emerges most clearly from the persistent difficulties of the manufacturing industry, whose performance fell by 3% last year, according to Destatis. The collapse of the German automotive sectormeanwhile, represents a “boon for China”, as AFP writes: the Asian giant is nibbling away at “important market shares”, particularly in the automotive, chemical and machinery sectors, as highlighted by the Bundesbank. In addition to the risk ofincrease in duties under the Trump presidency, the situation is worsened by threats of Chinese retaliation on the surcharges imposed by the EU on electric vehicles coming from China.

As if that wasn’t enough, not even private consumption is coming to the rescue: “Families have refrained from purchasing despite the increase in incomes”, due to uncertainty, points out Ruth Brand, president of Destatis. Even the traditionally strong job market is showing signs of weakening as the aging country faces a labor shortage.

We need “a return of confidence and growth in Germany” with a government that favors “structural reforms, investments and a more flexible fiscal policy”, comments Carsten Brzeski of Ing Bank. Amid this collapse, some good news: the German public deficit remained at 2.6% of GDP in 2024, still below the EU average of 3.1%.