Germany narrowly escaped a recession in the third quarter, with GDP edging up by 0.2% due to increased government and household spending. However, this marginal growth does little to change the grim outlook for Europe’s largest economy. Structural challenges, including high labor costs and declining demand for German exports, particularly in China, threaten the country’s economic stability. The crisis facing Volkswagen, Germany’s largest automaker, epitomizes the broader industrial challenges Germany faces as it grapples with high costs, slowing demand, and fierce international competition.
Fragile Growth in a Challenging Economic Landscape
Germany’s GDP grew by 0.2% in the third quarter, a minor reprieve following a 0.3% contraction in the previous quarter. Yet, this uptick belies underlying weaknesses: the International Monetary Fund predicts zero economic growth for Germany in 2023, marking the worst performance among major economies. This stagnant outlook reflects the dual pressures of a weaker private sector and waning global demand for German products.
Volkswagen’s struggles underscore these issues. The automaker reported a 21% drop in operating profit for the first nine months of 2023, alongside a 4% decline in vehicle sales due to weak demand in China. “We have not forgotten how to build great cars,” Volkswagen’s CFO Arno Antlitz remarked, but he stressed that the company’s domestic costs are “far from competitive.” Volkswagen’s woes illustrate Germany’s broader industrial challenges and the precarious position of its manufacturing sector.
Declining Demand and Domestic Challenges
German industrial output is increasingly under threat as foreign competition intensifies and demand from China—historically one of Germany’s largest export markets—wanes. Carsten Brzeski, global head of macroeconomics at ING, explains that China is no longer just a market for German goods; it has become a formidable competitor, producing many of the goods it once imported from Europe.
Volkswagen’s challenges mirror a broader decline in German manufacturing, which accounts for 5% of the country’s GDP. According to a study by the Federation of German Industries, 20% of Germany’s industrial output is at risk by 2030 due to high labor and energy costs, and a shrinking global market for its goods. The German Economic Institute and Boston Consulting Group co-authored the report, highlighting how high taxes, aging infrastructure, and a limited skilled labor supply further erode Germany’s competitive edge.
Calls for Transformation in German Industry
For Germany to maintain its industrial strength, economists argue that significant investments are needed. The Federation of German Industries estimates that Germany requires €1.4 trillion ($1.5 trillion) in investments by 2030 to support areas like green technologies, infrastructure, and education. “The biggest transformation effort since the postwar period” is needed, the report warns, citing the erosion of Germany’s traditional lead in fields like combustion technology.
Yet, implementing such an economic overhaul is unlikely under current political and fiscal constraints. Germany’s constitutional “debt brake” restricts government borrowing, and the country’s coalition government has struggled to present a unified economic vision. Brzeski believes that economic progress may only be feasible after the general elections in September 2025, which could bring a new government and potentially a fresh approach to Germany’s economic policies.
An Uncertain Path Ahead
Lower inflation rates may offer some short-term relief for German consumers, but sustainable growth appears elusive in the near term. According to Brzeski, “In my base case scenario, we will have another year of a more or less stagnating economy.” The need for structural reforms, particularly in manufacturing and energy costs, is urgent, but real progress may have to wait for the political landscape to stabilize.
Germany’s narrow escape from recession provides little comfort amid a challenging economic environment and waning industrial competitiveness. With structural weaknesses and high costs weighing down manufacturing giants like Volkswagen, the German economy faces a crucial turning point. Significant investment and policy reform will be necessary to restore Germany’s position, but tight fiscal constraints and political gridlock hinder the path forward. As Germany navigates these complexities, it faces a prolonged period of economic stagnation unless transformative measures are enacted.
