Despite the German government’s growth initiative, the economy remains in crisis with no short-term recovery in sight due to multiple critical factors.
The German economy continues to shrink, with the latest quarterly figures confirming a crisis mode. Investments are increasingly being made abroad rather than in Germany. The pandemic and the war in Ukraine have left a financial hole of €545 billion, according to a study. Decreasing demand and consumption expenditures exacerbate the problem. The Ampel coalition plans to curb the crisis with its growth initiative by the next parliamentary election. However, the Institute for German Economy (IW) sees no short-term end and cites four clear reasons against it.
Four reasons against an economic upturn
Germany’s GDP decreased by 0.1% in the second quarter compared to the previous quarter. The economy also shrank by the same value compared to the previous year. These figures were released on Tuesday by the Federal Statistical Office after adjusting for prices and the calendar. Comparing these numbers with other European countries’ quarterly figures from the previous year, only Ireland and Latvia’s GDPs also declined. In all other countries, GDP rose, some significantly. France saw a 1.1% increase compared to the previous year, while Spain experienced a 2.9% rise.
It’s been nearly two years since the German economy increased by more than half a percentage point in a quarter. The IW sees no forthcoming change. An IW analysis suggests that Germany will remain in crisis and lists four reasons:
- Increasing numbers of companies are investing abroad. High costs for energy, labor, and capital make investments in Germany uncertain.
- Germans are saving and spending little; household expenditures are over 2% below pre-crisis levels.
- Demand from German companies is decreasing. Domestic orders are at a low, and foreign orders have also significantly declined.
- Since 2022, export numbers in Germany have not increased, due to geopolitical conflicts and deglobalization.
Skepticism towards the growth initiative
The IW does not foresee a short-term improvement in the four factors. “The location is too expensive, the infrastructure is dilapidated, and bureaucracy is paralyzing,” the report states. According to both internal and external calculations, the investment need for the next ten years is €600 billion.
The government aims to stimulate the economy with its growth initiative. At a press conference before the summer break, Chancellor Olaf Scholz expressed optimism that the reforms had found positive resonance with the German economy and trade unions. The IW, however, is skeptical of the initiative. Disagreements within the Ampel coalition could further drive companies to relocate abroad.
In the past four years, investment shortfalls have amounted to €155 billion. IW economist Michael Grömling warns, “The lack of investments will long-term reduce our ability to tackle challenges such as digitalization, skills shortages, or climate change.”
