New data from Germany presents a bleak outlook for the country’s economy in the near future. The country has entered a recession this year, and investor sentiment has declined rapidly due to the pandemic. The OECD predicts that Germany’s growth will be the lowest among major economies in 2023. However, the challenges go beyond just the short-term. Geopolitical tensions, such as Russia’s invasion of Ukraine and US-China conflicts, have exposed vulnerabilities in Germany’s international economic model and highlighted long-term challenges.
German Chancellor Olaf Scholz has shown ambition in attempting to reorient the economy. This includes reducing Germany’s reliance on Russian energy and establishing new supply chains for industries. The government has been proactive in implementing these changes. By aiming for renewables to make up 80% of its power mix, Germany has become an attractive destination for green investments. There is also significant investment in boosting the semiconductor industry. Despite dire predictions for a deep recession this year, the German economy has displayed resilience. However, the tasks ahead are immense.
Germany has significantly reduced its dependence on Russian gas by rapidly constructing LNG terminals to enhance energy security. Nevertheless, with the phase-out of nuclear reactors and slow progress in renewable energy, Germany still relies on imports and fossil fuels, leaving it vulnerable to volatile global prices.
Diversifying the economy is a complex challenge as well. Manufacturing accounts for a quarter of Germany’s output. The automotive industry, a crucial sector, has been in decline since 2018. Germany’s dominance in combustion technologies is being challenged by the rise of electric vehicles, where China holds a significant advantage. Reducing dependence on China, which is Germany’s largest trading partner for goods, will not be simple either, as many businesses consider it a vital market and supplier.
Scholz has called for a new approach known as “German speed” to achieve transformation. However, before that can happen, he must address the barriers that have long hindered the German economy. Lengthy planning procedures have delayed renewable infrastructure projects, such as wind farms. Reforms are underway, but there are concerns about excessive bureaucracy, high energy costs, and limited digitalization, which hinder dynamism in the business sector. Despite its economic success, Germany has not produced any world-class tech companies since the founding of SAP over 50 years ago.
Labour shortages pose another obstacle. By 2035, Germany is expected to face a shortage of up to 7 million workers, partly due to an aging population. Skilled workers in trades, electrical engineering, and professional services are in short supply, but these sectors are crucial for Germany’s economic ambitions. Immigration rule changes are being considered. Furthermore, economic reforms will require additional public investment and incentives. However, financial demands will be strained due to an older population and commitments to increase defense spending. Internal disagreements within the coalition government have also hindered progress.
In many ways, Germany is a victim of its own success. Its economic model thrived during the era of rapid globalization that followed the fall of the Berlin Wall. However, times are changing, and the factors that contributed to its past competitiveness and resilience are now being challenged. Long-standing issues related to regulations, digitalization, and labor supply, which seemed less urgent during times of prosperity, are now impeding agility. Only by addressing these underlying barriers to growth can Germany renew itself.
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