In recent weeks, I’ve aimed to delve into the challenges plaguing the German economy, an issue brought to light by recent developments. With Donald Trump positioned for potential re-election, there is a looming threat of tariffs that may further complicate the situation for German exporters. Additionally, Germany is gearing up for a general election on February 23 next year, a shift occurring months earlier than anticipated due to the dissolution of Olaf Scholz’s governing coalition.

My observations were underscored by a recent discussion I participated in hosted by the German British Roundtable. It’s noteworthy how both Germany and Britain are grappling with a common hurdle: the urgent need for economic growth.

A glance at the growth statistics among G7 nations since the onset of the pandemic reveals Germany at the bottom of the pack, showcasing a meager 0.2 percent cumulative growth from the fourth quarter of 2019. The UK’s performance, while slightly better at 3 percent, still pales in comparison to countries like Japan, Italy, Canada, France, and the significantly more robust American economy.

This trend is mirrored in last year’s annual growth figures, with Germany experiencing a contraction of 0.3 percent compared to the UK’s modest gain. Historically, the UK had outpaced Germany in growth during the 1990s and 2000s, but since 2010, both nations have been on parallel paths, averaging growth rates of 1.5 percent for Germany and slightly higher for the UK at 1.6 percent.

Both countries have encountered their unique challenges. Germany’s reunification introduced economic and political complications, compounded by the eurozone crisis in the early 2010s. Meanwhile, the UK has faced stagnated growth since the financial crisis of 2008-09, exacerbated by the ramifications of Brexit.

The perception of Germany in the UK remains as an economic juggernaut, reminiscent of the post-war “Wirtschaftswunder” era of the 1950s and 60s. However, Germany’s economic prospects have soured in recent years, shifting from a perceived engine of European growth to a significant impediment.

In a recent assessment released by Germany’s Council of Economic Experts, the outlook appears bleak. They stated, “Germany clearly lags behind other advanced economies in terms of GDP growth, indicating it is hindered by both cyclical and structural issues. Even as energy prices have stabilized post-crisis, they remain elevated compared to pre-pandemic levels.”

The council further noted that while real incomes have rebounded from inflation-related losses, consumption has stagnated, with a high savings rate persisting. Additionally, Germany’s competitiveness in manufacturing is declining, with no signs of recovery on the horizon. Labor productivity and capacity utilization in the sector have also dipped, leading to a prediction of minimal economic growth for the upcoming year, leaving Germany trailing behind other developed economies.

Germany seems to be in a period of low growth, with its traditional strengths in manufacturing and exportation now appearing as liabilities. The automotive industry, a key pillar of the German economy, faces significant challenges. Volkswagen is set to shutter three factories in Germany, and Audi plans to close another facility in Brussels next year.

The shift to electric vehicles is proving difficult for German automakers, mirroring challenges in the UK’s automotive landscape. The recent announcement of Stellantis’s van factory closure in Luton coincides with reports of an ongoing decline in UK car production for eight consecutive months.

UK car production has now diminished to less than half of its 2016 levels, becoming an uncomfortable reality for the economy. For Germany, where vehicles are integral to industrial strength and exports, the hurdles faced by the automotive sector present a more profound economic challenge. Both nations continue to feel the repercussions of Brexit.

Moreover, the most significant challenge for Germany is the intense competition it faces from China in the electric vehicle market. If China continues to dominate, Germany’s prospects for recovery through manufacturing and exporting will be severely limited.

Both Germany and Britain urgently require stronger economic growth. As previously discussed, UK GDP per capita has only increased by 5.5 percent over the past 16 years, a stark contrast to the 45 percent growth seen in the preceding years.

While both nations need to stimulate growth, their approaches diverge. The UK faces limitations due to public spending constraints, with national debt nearing 100 percent of GDP. In contrast, German government debt is slightly over 60 percent, suggesting a potential for more fiscal flexibility, particularly with upcoming debates surrounding the debt brake policy.

Germany’s economists recommend reforming this policy to allow greater fiscal maneuverability while preserving stability. In certain areas, Germany could potentially benefit from learning from the UK’s experiences; however, it also provides valuable lessons in areas like productivity and business investments.

In contrast to the struggles posed by US tariffs and fluctuating global trade, the UK has performed poorly in exports. Recent figures indicate that UK export volumes remain below 2019 levels. Comparatively, Germany’s exports in current dollar terms are roughly double those of the UK.

Observing the current economic struggles of Germany is surprising, as it traditionally thrived. However, this isn’t a cause for rejoicing; both nations require enhanced growth, and Germany’s challenges highlight the broader difficulties of achieving this in a complicated global landscape.

PS

Last week, I was in America, albeit hindered by a canceled return flight, which has become a recurring issue as of late. There appears to be a growing trend in flight cancellations, currently averaging between 600 and 700 daily, attributed to adverse weather and shortages of engine parts.

During my trip, I was also present when Donald Trump disclosed some cabinet nominations, including the significant appointment of Scott Bessent as Treasury Secretary—a noteworthy selection. Bessent’s influence on UK economic policy predates this role; notable due to his history with George Soros during the early 1990s.

His decisions during the UK’s tenure in the European exchange rate mechanism culminated in significant market shifts and ultimately led to the end of Britain’s participation with the ERM. His involvement was instrumental during a critical period when the UK faced economic turmoil.

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