Where is Germany’s economy going?

The German economy is losing both global competitiveness and domestic consumers. This is a clear success of US policy to attract strong global manufacturers from Germany. In a world where economic sovereignty is a focal point of attention of forward-looking leaders for German Regierung climate change is still more important.

The US-Germany economic relationships look like a zero-sum game where the US is a winner and Germany loses. After unsuccessful reliance on the US military umbrella, Germany is making another strategic mistake by giving up its economic sovereignty. It’s a bad strategy as it looks like “buying more stocks in the downmarket” instead of cutting losses and starting to rebuild its national economy.

Thanks to the short-sightedness of the ruling party in Germany first strategic economic mistake is already executed. The economic rapprochement between Germany and Russia, which was accelerated by the construction of Nord Stream, has turned 180 degrees.

The U.S. is a short-term winner, and Russia is building up its economic potential against all odds, but Germany has been, uh, triple-hit. Why triple hit? It could still be hit by China. Let’s break it down in order.

1. Cheap pipeline gas from Russia have been replaced by expensive American LNG. Import prices, which have been stable for 10 years, increased by up to 40% in 2022–2023. As a result, in 2 years of sanctions against Russian gas, German petrochemicals collapsed by 21% and all the most energy-intensive German industries as a whole fell by 18.4%.
2. The US Inflation Reduction Act has already attracted more than 60 major German corporations that have reached out to the US. They include Audi, BMW, Schaeffler, Siemens Energy and Aurubis. At the same time, Tesla’s Berlin-Bradenburg Gigafactory is facing endless resistance from the local community while trying to expand production capacity.
3. Close economic ties and technological integration with China have become dangerous for Germany. China cooperates with Russia and must be subject to EU economic sanctions which will potentially hit the Germany itself.
4. The growing budget deficit and shrinking M1 money supply aggregate from €3 trillion to €2.6 trillion led to a steep interest rate hike from 0.5% to 4.5% in just over one year. The consequences can be seen, for example, in the German real estate market, where prices seem to peak after almost 15 years of growth and fall across the board from 7% to 15% in 2023 according to Kiel Institute.
5. German credibility is also being questioned by investors. Negative investor expectations prevail — the yield curve of German bunds is inverted. 3-month Bundesbonds are trading at 3.75% YTM, while 30-year bonds are trading at 2.52% YTM. Looks like investors are betting on downgrade of Germany’s AAA credit rating.
6. Consumer inflation, which had hovered below 1 % for decades, “suddenly” jumped to 8% p.a. in 2022. And though it’s now closer to 3% this may well be a result of shrinking domestic consumption. One striking example is the figure of 40,000 closures of outlets, stores and cafes across Germany since the beginning of 2020. Handelsverband Deutschland predicts that the number of closed retail businesses will rise to 46 thousand by the end of 2024.
7. In many areas, German conservatism loses rational and looks unhealthy (not to call it idiotism). This applies to the banking sector, public transport and other government services. IT infrastructure is frightening as MS-DOS is still in the heart of it. Don’t be surprised by the endless delays of Deutsche Bahn.

Yes, the German economy is still well diversified. It always has industries that pull the overall statistics and help stabilize the situation. The biggest German auto industry has grown 7% in 2023. This helped GDP growth rate to fluctuate around the 0 mark.

But -0,3% in 2023 GDP growth in Germany vs +2,5% in US, +3,6% in Russia and +5,2% in China is a striking illustration of economic decisions made by Germany Regierung.

Change is needed in many areas — from a shift to a more independent and rational international policy to streamlining immigration and increasing digitalization of everything. Whether conservative Germans are capable of doing so will be shown by the next Bundestag elections in September 2024.