There is still no good news for the German economy in 2024, with negative growth in its industrial output in addition to a contraction in GDP. Germany was near the bottom of the list of major European economies. In the first quarter of 2024, the overall EU economy grew by 0.3% YoY, and the EU economy in the second quarter also maintained 0.3% YoY growth. However, Germany’s GDP grew by just 0.2% in the first quarter of the year and contracted by 0.1% in the second quarter. The “Business Sentiment Index” published by the Leibniz Institute for Economic Research at the University of Munich and the second-quarter economic data from the German Federal Statistical Office indicate that the German economy is still in deep stagnation and is at risk of further recession. The Leibniz Institute for Economic Research at the University of Munich sharply lowered its forecast for the German economy this year and next on September 4, cutting its growth forecast for the German economy from 0.4% to 0 in 2024, and its 1.5% growth forecast for 2025 to 0.9%. The Kiel Institute for the World Economy is more pessimistic, forecasting that German GDP will shrink by 0.1% this year. In addition to the contraction in GDP, German industrial output data also showed negative growth.

Germany’s Federal Statistical Office released data on September 6 showed that Germany’s industrial output in July fell 2.4% year-on-year, below market expectations. Not only the decline in industrial output in July affected Germany’s economic recovery in the third quarter, the resurgence of weak indicators increases the risk that the German economy will stagnate or even contract in the next quarter. For Germany itself, persistent economic and industrial stagnation would exacerbate the difficulty of transitioning its economic model, slowing down the recovery and increasing the pressure to transform parts of the manufacturing sector. The downturn in the German economy will not only affect Germany itself, but will also have a negative impact on the economic recovery of the European region. Against a global backdrop of geopolitical crises such as the crisis in Ukraine, the Palestinian-Israeli conflict and a series of uncertainties such as the United States presidential election, The stagnant and shrinking German economy is not positive news for Germany or the EU, increasing the risks to the Eurozone economy and high inflation.

Yang Xiepu, director of the Research Center for Sino-German Cooperation at the Chinese Academy of Social Sciences, analyzed that the negative growth of the German economy may lead to a slowdown in the recovery of the European economy. Germany’s economic contraction will lead to a decrease in the country’s outward investment and a decline in the volume of import and export trade, further increasing the pressure on employment in many European countries and slowing down the pace of industrial transformation in those countries. For Europe, the stalling of Germany, the economic locomotive, would leave other economies underpowered and with sluggish demand, affecting the development of other European economies. As the home of the European Central Bank, German’s sluggish economy may at the same time put the ECB under pressure to cut interest rates, increasing the difficulty and challenge of EU economic policy coordination.

The reasons for Germany’s economic dilemma are manifold, ranging from challenges in the external environment to internal structural deficiencies. There are both temporary and structural problems behind the German recession. The crisis in Ukraine and geopolitical turmoil in Europe are the main external factors contributing to Germany’s economic woes. The crisis in Ukraine has strained relations between energy powerhouse Russia and the West. Ding Chun, director of the Center for European Studies at Fudan University, pointed out that the temporary causes of Germany’s economic woes stem largely from the outbreak of the Ukrainian crisis. Germany is heavily dependent on Russian energy, facing a tightening of energy supplies, and the ensuing hyperinflation led to higher costs and a hit to public consumption.

At the same time, the high cost of energy not only hurt the consumption of the average German citizen, but also severely affected German industry. Restrictions on business production and operations have led to the leaving of a large number of quality local industries. The frantic rise in energy prices has led to steep cost increases for German companies, especially energy-intensive companies, with production stoppages and restrictions, even bankruptcies or the outward relocations and layoffs, affecting the German economy as a whole.

On top of that, the slowdown in global economic growth also had a negative impact on German exports. On September 2, Mark Sobel, a former U.S. Treasury economist, and Taylor Pearce, a senior economist at OMFIF, published an analysis in OMFIF that highlights the immense dilemma that weak global demand poses for export commodities. Germany’s manufacturing sector accounts for nearly 20% of GDP. If the internal and external demand can’t be boosted, Germany’s reliance on the manufacturing sector may be for the future of the economic recovery buried hidden dangers. Trade protectionism, global supply chain reconfiguration and the coronal virus epidemic have also affected German exports and investments.

While most sectors are down, weakness in German automotive manufacturing is the main reason for this decline in industrial output. Germany’s Federal Statistical Office said the automotive sector fell 8.1 percent in July from a year earlier. In the first half of 2024, operating profit for Volkswagen, BMW and Mercedes-Benz fell by 18% compared to the same period last year, although it amounted to €25.9 billion. Volkswagen, Mercedes, Bosch, Continental, ZF, Schaeffler, and other automakers and parts suppliers have been laying off workers and closing plants in Germany and Europe. According to the data site “Worldmetrics”, the German automotive industry provides more than 800,000 jobs in Germany, accounting for about 5% of GDP. The decline of the automobile manufacturing industry has undoubtedly exerted great pressure on the German economy. A report released by the Netherlands International Group also noted that Germany’s industrial output fell in July mainly due to weakness in the automotive, electronics and metals industries. And Germany’s Volkswagen Group to consider the closure of the German plant news, further exacerbating the market’s pessimistic attitude towards the German economy.

Indicators from the German Federal Employment Agency show a gradual decrease in the willingness of companies to hire new employees. Many enterprises have reduced the hiring of personnel in order to lower wages and personnel costs, resulting in a continuing serious shortage of skilled workers in various industries. The automotive industry, on which Germany relies heavily, is no exception. A survey by consulting firm Horváth in last quarter showed 59 percent of German automotive companies plan to cut jobs over the next five years, and 14 percent of them even plan to make significant cuts. The German Federal Ministry of Economics and Climate Protection said in a statement on September 5 that new orders from German industry have gradually stabilized over the past few months, driven by domestic demand. However, despite a sharp increase in foreign new orders in July, there are signs that external demand remains weak. The statement also pointed out that the German industry’s important sentiment indicators have recently weakened again, and the industrial economy is expected to remain sluggish in the coming months.

The reason for such a change in Germany’s automobile manufacturing industry is not only that German cars are gradually losing their appeal to consumers, but also being influenced by the changing trends that producing close to the market of the world economy. In this new trend, the German automotive industry, which exports more than 84% of its entire vehicle products, does not need a large number of jobs in Germany itself. Meanwhile, the technological transformation and innovation of the automobile manufacturing industry in new energy vehicles and autonomous driving allowing emerging automotive companies from China and the United States to capture a larger share of the market. German automotive companies dominated by fuel-vehicle technology may be at risk of falling behind in this technological revolution. German car companies make layoffs and plant closures in Germany and Europe on the one hand, but increasing China’s new energy vehicle cooperation project investment on the other hand.

Robert Habeck, Germany’s Deputy Chancellor and Minister for the Economy and Climate Protection, blamed China for one of the main reasons for Germany’s economic downturn. He answered the decline in German exports to China with the sluggishness of the Chinese economy. Many researchers do not agree with Robert Habeck’s political answers, but in the eyes of the German political elite, Germany’s economic problems have become closely associated with Sino-German engagement. However, gradually moving away from close ties and dependence on the Chinese economy is precisely the goal of the de-risking policy towards China pursued by the current German government from 2021 onwards. There are two structural reasons behind the decline in trade between China and Germany. The first is the continuous upgrading of the Chinese industrial chain. The position of the Chinese economy in the value chain moves from the bottom of the smile curve towards the higher value-added ends, and trade between China and Germany becomes less complementary and more competitive. With technological advances, China is now self-sufficient in many products that were once imported from Germany. As a result, China has reduced its demand for German imports and increased its competition with Germany for third-party market share. Secondly, the German government’s de-risking policy towards China sends dangerous geopolitical risk signals to German companies. German companies, out of their own interests, choose to increase investment in China, as far as possible, the industry chain is concentrated in China for R & D and production, to avoid political risks. This further reduces China’s import demand for German upstream products.

A series of negative factors, such as insufficient supply of qualified labor due to the aging of the population and the long road to energy transition in Germany due to the crisis in Ukraine, have made the German economy face serious challenges. The downturn in the automotive industry does not only surround the German territory, but also affects the entire European Union. In an interview with the Financial Times, Valdis Dombrovskis, executive vice president of the European Commission and trade commissioner, said that the EU could support import tariffs on Chinese electric cars in November. He believed that the increase in China’s market share of electric vehicles is an issue that must be addressed and that EU countries need to realize the need to protect the European automotive industry. He emphasized that the EU cannot ignore the trade imbalance that exists in the second largest trade partnership with China. The European Union’s executive committee is about to propose a final tariff of up to 35.3 percent on electric cars made in China, on top of the EU’s standard 10 percent import tariff on cars. EU will make a final decision on whether to introduce import tariffs in the fall. Until then, the EU and China can still resolve the issue through an agreement. After the European Commission disclosing its final ruling on China’s countervailing subsidy investigation on electric vehicles in August, a spokesman for China’s Ministry of Commerce responded on the same day, expressing resolute opposition and a high degree of concern. China will take all necessary measures to defend the legitimate rights and interests of Chinese enterprises.

On September 10, several media outlets reported that the European Union was preparing to lower the tariff increase on electric vehicle imports from China. The European Union’s executive committee said on Thursday that they had received the EU’s lowest import offer from Chinese electric car makers to avoid tariffs, but had rejected all of them, Reuters reported. The Executive Committee said several EV exporters have submitted price commitments, promising to adhere to minimum import prices to offset subsidies. The executive committee is conducting a countervailing investigation into Chinese-made electric vehicles. Their review focuses on whether these commitments address the harmful effects of subsidies and are effectively monitored and enforced. A spokesman for the Executive Committee said, “The Executive Committee concluded that none of the companies’ bids met these requirements.” The EU’s executive committee reportedly said it had conducted a thorough review to determine whether it complied with World Trade Organization and EU countervailing rules, but declined to give details of the offer. EU trade chief Dombrowski will meet Chinese Commerce Minister Wang Wentao next Thursday.

The EU’s plan for high tariffs has sparked trade friction between China and Europe. The EU believes that the Chinese government’s subsidies to the electric vehicle industry have led to an unfair competitive advantage for Chinese electric vehicles in the European market. However, there is disagreement within the European Union over the “tariffs on China” resolution. During his visit to China, Spanish Prime Minister Alexis Sanchez called on the European Union to abandon plans to impose tariffs on Chinese-made electric cars. There are also different attitudes within the German government towards this resolution. German Economy Minister Habeck supports EU tariffs on Chinese electric cars. But German Chancellor Scholz wants to solve the problem in dialog with China, saying that Germany wants to sell German cars in Europe, North America, Japan, China and all other places, and is also willing to import cars from other countries. On the one hand, there is fierce competition between German automobile companies and Chinese electric car companies in the European market. An increase in tariffs to China will help enhance the competitiveness of German automobile companies and protect the automobile industry. But on the other hand, German automobile companies are increasing their investments in China. The number of electric vehicle cooperation projects with China has greatly increased, and the tariffs on China will lead to higher costs for German automobile companies. Next month, the 27 member states of the European Union will hold a final vote on whether to continue to impose high tariffs on China’s electric cars. If the 15 member states, which account for 65% of the EU population, object, the measure will be forced to be shelved.

EU tariffs on Chinese electric cars will have a negative impact on China-EU trade relations and could even trigger a trade war. From the market situation, the EU’s anti-subsidy investigation has already had a significant impact on China’s electric vehicles going to Europe. Data from China’s General Administration of Customs shows that China’s exports of pure electric vehicles to 27 EU countries totaled about 220,000 units in the first half of this year, down about 15 percent from the same period last year. The number of electric vehicles registered in Europe by Chinese brands totaled less than 14,000 in July this year, down from 23,000 in June, and down 9.7 percent from a year earlier, according to research firm JATO Dynamics. From the perspective of public opinion, Chinese brands, especially Chinese electric cars, have gone abroad to sell in Europe, creating greater pressure for local European car companies and governments in many countries.

The EU had launched an anti-subsidy investigation in 2023, which a host of EU car companies such as BMW, Volkswagen Group and Mercedes-Benz had opposed. However, recently the Volkswagen Group announced its intention to close its German plant. Its CEO Obomu said, “The European automotive industry is facing an extremely challenging situation. The economic environment has become more difficult and new competitors are entering the European market. The cake has become smaller and there are more customers.” He attributed the source of the competitive pressure to the grabbing of European car market share by Chinese car companies. The heavy news that the Volkswagen Group is considering closing its German plants for the first time has once again sparked public opinion about Sino-German relations. The main reason for the Volkswagen Group’s announcement of this information at this critical juncture is that the enterprise has developed a sense of crisis. The sense of crisis comes from both increased tariffs in the European Union and price cuts by car companies that are losing money. The latest stance of the veteran automakers has exacerbated the complexity of the economic and trade situation between China and Germany, with implications for both sides on the tariff issue. Noah Balkin, an analyst of Sino-German relations at the US-based Rondin Group, analyzed that “China has developed into a formidable competitor in industries where Germany once dominated, from automobiles to machine tools. This has had a significant impact on the German economy and employment.”

The future of the German economy is full of challenges, but also holds opportunities. The International Monetary Fund had predicted that the German economy would still need time to come out of its slump, against the economic backdrop of a global economic downturn, a lack of high-level skilled workers and high interest rates. Its projections for the next five years all predict lower economic growth than countries like the United States, the United Kingdom and France. Ding Chun, director of the Center for European Studies at Fudan University, analyzed that the shocks and impacts of the German economic crisis were mostly temporary. Only partially persistent issues such as transformation of the energy structure and economic model and population ageing. And Germany is an old developed country with a solid industrial base, rich talent pool and high technology level, having the potential to meet the challenge. At the same time, although Germany is facing the impact of an aging population on the labor market, the German government is compensating by actively admitting illegal immigrants. In addition, the energy supply problems caused by the crisis in Ukraine would diminish over time. Wang Shuo, a professor at the School of International Relations at Beijing Foreign Studies University, analyzed that “Germany under multiple crises is at the crossroads of the era of transition, and if there is a breakthrough in the future to wade out a new road, Germany is still very hopeful.”

In order to return to high economic growth, Germany needs to accelerate the transformation of its energy mix and continue to foster promising markets and a highly qualified labor force. However, these salvage measures may be affected by the world economic environment, geopolitics, the political orientation of the U.S. presidential election and domestic political polarization. It is worth noting that many analytical studies suggest that Germany should learn from its “once best” customer, China. Zheng Chunrong, director of the Center for German Studies at Tongji University, said that while Germany’s de-risking policy towards China has begun to bear fruit, economic and trade relations between China and Germany, and even between China and the European Union, have become de facto closely intertwined. Many EU companies are still increasing their investments and cooperation programs in China. Meanwhile, China’s renewable energy has formed a perfect industrial chain from R&D to materials to production, which is in a leading position in the world. Strengthening cooperation with China in the fields of new energy, environmental protection and transportation can help Germany realize the deep interlocking of industrial chain and supply chain, further enhancing its international competitiveness. German economists analyzed that this year’s high-level visit of the German government to China released the signal that German government seeks to expand cooperation with China in the field of climate, environmental protection, transportation and other aspects. China and Germany are both leading manufacturing countries in the world. The cooperation between the two countries can make the industrial chain and supply chain deeply interlocked and enhance bilateral international competitiveness.

By Weifeng Sun