Since reunification in 1990 Germany’s real GDP has grown at a surprisingly steady annual rate of almost 1.3%. In the beginning it was mostly the result of large productivity gains (defined as real GDP per working hour), later, as productivity became less dynamic, it was driven by a robust expansion of labor input, caused by a significant increase of labor market participation rates (of women and older workers) and liberal large-scale immigration policies.
Economic growth came to an end in 2019. At the end of 2024 real GDP was not bigger than five years earlier and about 4% below trend. More worryingly, leading business cycle indicators, especially incoming orders to manufacturing and construction, suggest that this year’s recovery will be rather modest, with consensus forecasts calling for a growth rate of between 0.5 and 1%. This is in spite of the large euro depreciation and the likelihood that the incoming government will put more emphasis on economic growth. The output gap will thus increase further – the German economy continues to operate far below potential.
Even so, key fundamentals remain sound, going by, for instance, the qualification of the work force, saving and investment ratios, the number of patents, the health of public finances, the balance on current account or the volume of net foreign assets. No Western European country supports beleaguered Ukraine nearly as much as Germany, and no other country has welcomed so many refugees.
But the economy is in the middle of almost revolutionary structural changes which have a negative short-term impact on GDP growth. The relative prices of energy have increased a lot, and certainly more than in countries which care less about climate change, such as the US, China or OPEC – which puts Germany’s industry at a competitive disadvantage. And then there is the formidable and rapidly intensifying competition from China, where a huge domestic market generates economies of scale; in addition, the (communist!) government subsidizes production in sectors which are deemed to be important in a modern economy, such as EVs, solar panels, electric batteries, wind mills, robotics and machine tools – they are challenging Germany head-on.
As in most rich countries the gradual and seemingly unstoppable de-industrialization poses another challenge. So far, job losses have been compensated by gains in services, especially in health, education and business services. But almost 20% of gross value added are still generated by manufacturing, a ratio about two times higher than, for instance, in the US, in France or the UK. No wonder that it hurts when output declines significantly: it has fallen by about 13% since the last cyclical high in 2018. Energy production has shrunk even more, by no less than 27% during that time: demand has been very weak. All nuclear and many coal power plants have been shut down by now.
For the environment, these developments have been beneficial. Since 1990, the emission of greenhouse gases has declined by an impressive 47.5%, and it is now quite probable that the country’s ambitious climate targets will be met, in spite of the rather disappointing CO2 reductions in the mobility and buildings sectors. Germany now accounts for about 1.6% of global CO2 emissions, compared to China’s 32% and the US’ 13%.
On balance, the economy is well positioned to compete in increasingly green and electrified global markets. It is becoming less dependent on cheap fossil fuel imports from Russia, the US and OPEC, not least because the marginal costs of wind and solar are heading toward zero which makes green investments increasingly attractive. Soon almost 100% of the energy supply will be from green electricity and green hydrogen.
Even so, not everything is just fine in the longer run. It makes me sick that the main topic in the present federal election campaign (until February 23) is how to keep out immigrants, both legal and illegal ones. Not enough is invested in the improvement of the ageing infrastructure, while the key role played by human capital in a country that lacks natural resources is not sufficiently appreciated by policy makers. Also: no one points out, it seems, that the further integration of the EU economy could provide a strong boost to growth – euro skepticism prevails. I wished the coming, probably conservative-led government would launch a growth offensive rather than try to “consolidate” the budget even more. It is about time.
About Wermuth Asset Management
Wermuth Asset Management (WAM) is a Family Office which also acts as a BAFIN-regulated investment consultant.
The company specializes in climate impact investments across all asset classes, with a focus on EU “exponential organizations” as defined by Singularity University, i.e., companies which solve a major problem of humanity profitably and can grow exponentially. Through private equity, listed assets, infrastructure and real assets, the company invests through its own funds and third-party funds. WAM adheres to the UN Principles of Responsible Investing (UNPRI) and UN Compact and is a member of the Institutional Investor Group on Climate Change (IIGCC), the Global Impact Investing Network (GIIN) and the Divest-Invest Movement.
Jochen Wermuth founded WAM in 1999. He is a German climate impact investor who served on the steering committee of “Europeans for Divest Invest”. As of June 2017, he is also a member of the investment strategy committee for the EUR 24 billion German Sovereign Wealth Fund (KENFO).
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