The impact of the pandemic, the Russia-Ukraine war, and inflation on Germany's economy

German manufacturing has long been synonymous with quality—be it in the automotive or broader industrial sectors. Yet, Germany’s economy has clearly suffered substantial blows from both the pandemic and the Russia-Ukraine conflict. Consider Germany’s renowned brands: Mercedes-Benz, BMW, Siemens, Porsche, Bosch, Volkswagen, Audi, Adidas, and others. Automotive companies dominate this list—and they are largely incumbents in internal-combustion engines, lagging significantly in new-energy vehicles. Moreover, Adidas’s influence in China has waned steadily following the Xinjiang cotton controversy. The current state of these German enterprises reflects Germany’s broader economic reality. Its trade deficit is no mere coincidence. On July 3—the day before this report—BYD released its production and sales data for June 2022. The figures showed that BYD’s cumulative new-energy vehicle sales in the first half of 2022 reached 641,350 units, a 314.90% year-on-year increase. This not only solidifies BYD’s position as the domestic leader in China’s new-energy vehicle market but also means it has overtaken Tesla to become the world’s top-selling new-energy automaker. This stark contrast highlights how the rapid rise of Chinese automakers is eroding Germany’s traditional dominance in fuel-powered vehicle exports. Germany’s inflation situation has recently deteriorated sharply. According to data released by the German Federal Statistical Office, Germany’s inflation rate has risen month after month, driven by factors including the Russia-Ukraine conflict and the pandemic. In May, it hit 7.9%—the highest level since German reunification in 1990. Simultaneously, rising supply-chain costs and scarcity have prevented many export goods from being delivered on time, severely undermining this robust European economy. Media reports indicate that, to cope with the severe natural gas supply crisis, German Federal Vice Chancellor and Minister for Economic Affairs and Climate Action Robert Habeck announced on July 3 that the German government is amending the Energy Security Act. He stated that while preparing for potential natural gas cutoffs, Germany aims to distribute the additional costs borne by natural gas importers evenly across all consumers—to avoid overly severe social shocks. On July 4, Uniper—a major German energy company—announced that Germany’s first liquefied natural gas (LNG) import terminal, approved by the German federal government, had officially broken ground in Wilhelmshaven, a North Sea coastal city.

This time, the U.S. stirred up trouble—but unexpectedly handed Germany to China as a 'gift'

Current global instability stems largely from the United States’ persistent provocation and incitement of conflicts worldwide. The U.S. successfully instigated the Russia-Ukraine conflict. Initially, European countries assumed that aligning with the U.S. would bring them prosperity—or even allow them to share in Russia’s wealth. At the outset of the conflict, they acted accordingly. But the longer it dragged on, the less rewarding it became. Today, Europe faces severe blowback: soaring energy prices have dealt a heavy blow to its economy—especially to Germany, long regarded as the ‘locomotive of the European economy.’ Recently, the President of Germany’s central bank issued another warning: surging Russian natural gas prices could push Germany’s inflation rate above 10% this autumn—reaching the highest level in 70 years. Energy shortages have also caused electricity prices to skyrocket; Germany’s average annual electricity price has already risen by 11%, reaching €530.50 per megawatt-hour. Over the past year, benchmark electricity prices have surged roughly 500%. Consequently, German industrial producers’ cost expenditures have jumped 37.2%. In July, Germany’s Economy Minister had just unveiled plans to restart coal-fired power generation—only to be met with further misfortune: extreme summer heat across Europe triggered a once-in-500-years drought, drastically lowering water levels in the Rhine River—the continent’s golden waterway and Germany’s most vital inland shipping artery. Some 30% of Germany’s crude oil and coal transport relies on inland waterways, and fully 80% of that inland traffic flows along the Rhine. Now, the Rhine is nearly dried up—rendering commercial navigation impossible. As a result, the German government has turned its hopes toward nuclear power—but strong domestic opposition remains. A quick review reveals Germany’s extraordinary string of misfortunes—both natural and man-made. First came sanctions against Russia, triggering runaway prices for natural gas and other energy sources; then came soaring electricity prices; next came plans to restart coal plants—only to find the Rhine too dry to deliver coal; then came attempts to expand clean energy—yet nuclear power faces fierce public resistance, while photovoltaic prices themselves are spiking. And winter is fast approaching. In fact, Germany’s previous high-speed economic growth rested on two pillars: cheap Russian natural gas and China’s vast market.

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