The Wall Street Journal reports that the German economy has had no growth for five years. What is the current state of the German economy?

Germany believes that extracting oil and gas domestically and importing natural gas from elsewhere can fill its energy gap. However, this backup plan has been opposed by Germany’s Green Party. The Greens not only prohibit domestic oil and gas extraction but even oppose building liquefied natural gas (LNG) storage facilities at ports. After losing Russian gas supplies, seaborne LNG imports had been the greatest hope. Compounding the problem, Germany has persistently restricted nuclear power development in recent years. Nuclear energy now accounts for only 12% of total energy supply. Inadequate energy supply has caused electricity prices to surge immediately. Medium-sized enterprises in Germany’s most energy-intensive sectors—chemicals, steel, and automotive components—have suffered the heaviest blows. Coal prices have tripled. In June, food and tobacco/alcohol prices rose 8.9% year-on-year. In August, food prices rose 16.6% year-on-year. Wheat prices have surged about 60%. Used car prices even rose 25.3%. Fertilizer prices have tripled. In May 2022, import prices for other inorganic basic materials and chemicals rose over 65% year-on-year. Updated October 6: OPEC cut crude oil production by 2 million barrels per day; oil prices are expected to rebound further. III. Exchange rates: - The EUR/CNY exchange rate shows a downward trend on both monthly and weekly charts. - EUR/USD hit an all-time low of 0.95:1. IV. On the 28th, German market research firm GfK released a survey showing that Germany’s October consumer climate index fell from −36.8 in September to −42.5—the lowest level on record for four consecutive months. V. According to the Organisation for Economic Co-operation and Development (OECD), Germany will face economic recession next year, with GDP projected to contract by 0.7%. On September 26, the Ifo Institute for Economic Research released its monthly report, showing that Germany’s business climate index for September dropped sharply by 4.3 points to 84.3—the lowest since May 2020 and worse than market expectations. Ifo President Clemens Fuest stated: “The German economy is sliding into recession.” The report also revealed that surveyed firms hold negative views on both current conditions and future prospects; respondents across manufacturing, services, trade, and construction sectors generally judged the economic outlook as worse than their expectations in August. VI. Trade deficit: According to the latest trade data from the German Federal Statistical Office, in May Germany’s exports rose 11.7% year-on-year to €125.8 billion, while imports rose 27.8% year-on-year to €126.7 billion—resulting in a near €1 billion trade deficit. After adjustments for changes in statistical methodology, this marks Germany’s first trade deficit since 1991. China is Germany’s largest source of trade deficits: In Q2 2022, Germany’s deficit with China grew 245%, increasing by $17.8 billion—accounting for 44% of Germany’s overall trade balance change. Aside from energy, the largest deficit categories are: (1) organic chemicals ($14.3 billion); (2) electrical equipment and machinery ($5 billion); and (3) metals, plastics, and inorganic chemicals ($1 billion). Germany’s chemical industry is cutting production while simultaneously increasing imports. The chemical industry is Germany’s third-largest pillar industry; its production process relies heavily on natural gas—as fuel or raw material. Impacted by the energy crisis and supply bottlenecks, most German manufacturing firms are processing orders at abnormally slow speeds.

German economic growth forecasts have doubled, yet its manufacturing sector remains under pressure—could the Chinese market become a key variable?

One important reason is that the global economy has retained a certain degree of resilience—especially the AI boom, which has spurred global investment and demand across related supply chains, generating some new orders for German machinery and industrial equipment manufacturers. Another reason lies with the German government. In recent years, Germany has begun stimulating its economy through expanded infrastructure and defense spending; fiscal expansion is gradually forming demand support. Thus, the improvement seen in Germany’s economy this year is not baseless. But here, one detail must be noted: All five major institutions jointly forecast that Germany’s growth rate in 2028 will be only 0.4%. In other words, this year’s 1.3% growth looks more like a rebound from a trough—not a return to a high-growth cycle. Indeed, after several consecutive years of weakness, Germany’s GDP this year has finally surpassed pre–2022 gas crisis levels—a positive signal. Yet corporate investment and household consumption remain weak, and some hard data for Q3 have already begun weakening. So yes, Germany’s economy is indeed performing somewhat better than expected—but “better than expected” does not equal “having emerged from crisis.” II. Some institutions and scholars argue that Germany’s economic recovery remains fragile, with structural challenges still unresolved. What truly warrants concern is precisely the phrase left by Germany’s five leading research institutes after upgrading their growth forecasts: “the foundation of recovery remains narrow.” Dr. Oliver Holtemöller, Head of Economic Forecasting at the Halle Institute for Economic Research, stated: “The German economy is proving more robust than previously anticipated, yet persistently high energy prices and structural problems continue to weigh on economic activity.” This means Germany is currently facing not merely cyclical recession, but increasingly evident structural pressures. The first issue is energy. German manufacturing has long relied on stable and relatively low-cost energy supplies. But rising energy prices have eroded the cost advantage of energy-intensive industries such as chemicals, steel, and machinery. Germany’s Ministry of Economics’ September monthly report also notes that persistently high energy prices are suppressing private consumption and certain industrial activities. The second issue is population aging. Germany’s working-age population is growing feebly, constraining future labor supply due to demographic structure. This affects not only corporate hiring but also implies Germany’s potential growth rate cannot sustain past levels over the long term. The third issue is that fiscal expansion itself has limits. While increased government spending on infrastructure and defense can boost demand in the short term, sustained fiscal expansion will inevitably raise government deficits and interest burdens. The five institutions project Germany’s fiscal deficit as a share of GDP will continue rising, and debt ratios face further upward pressure. Thus, Germany now confronts a very real question: If fiscal stimulus can pull the economy out of the trough, what will sustain growth thereafter? If energy costs do not fall significantly, if demographic structures do not improve, if corporate investment does not genuinely recover, and if manufacturing competitiveness is not re-established, then growth driven by fiscal stimulus may solve only short-term problems. This is why Germany’s five leading research institutes titled their report directly: “Recovery Amid Structural Challenges.” Germany’s economy is not without recovery—but the recovery is followed by an even more difficult structural reform battle.

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