Germany is facing severe challenges as its manufacturing output drops, forcing it to import more goods, with strong economic repercussions. Much of this stems from Germany’s reliance on Russian energy, having made a significant attempt to diversify its energy sources over the last year. Oil and gas shortages since the Russian invasion of Ukraine early last year have sent energy prices rocketing and encouraged many companies to move operations to countries with cheaper gas and electricity as well as better energy security, hitting Germany’s economy hard.
In May 2022, Germany reported a foreign trade deficit of $1.03 billion. It was forced to import more goods than it exported for the first time in decades. It is now experiencing a trade surplus, but its exports remain low. Companies are increasingly moving to countries offering lower and more stable energy prices. Germany is expected to lose between 2 and 3 percent of its industrial capacity due to this trend, with the U.S. becoming a major attraction for manufacturing thanks to its tax breaks and other incentives for companies willing to use green technologies.
In July, German factory orders fell further, which is expected to hit the country’s economy hard throughout the rest of the year. Demand dropped by 11.7 percent in June, far higher than the anticipated decrease of 4.3 percent. This marks the biggest decline since the height of the pandemic in 2020. Output of everything, including machinery, tools, vehicles, consumer goods and intermediate goods, all decreased. The economy is still recovering from the winter recession and is now expected to barely expand in the second half of 2023, with the potential to fall into another recession.
In addition to companies leaving the German market, the country’s poor performance is closely linked to the low demand from China for German exports. China is Germany’s fourth-biggest export market. However, its slow recovery following the Covid pandemic has weakened demand for imported goods. In 2021, China was Germany’s second-biggest export market, but it has since “become a competitor and simply doesn’t need as many German-produced goods as it did in the past,” according to Carsten Brzeski, the global head of macroeconomic research at ING.
Many have also questioned the attainability of Germany’s ambitious green transition goals, intending to achieve net-zero carbon emissions by as early as 2045. Given its strong reliance on Russian gas, and scramble to find new suppliers last year, as well as the government’s anti-nuclear power sentiment, this is looking increasingly unlikely. Germany continues to rely heavily on wind, solar and hydro power as its main renewable resources. However, these are volatile sources, which will continue to provide only intermittent energy until Germany can substantially increase its battery storage capacity.
Recent reports from German government climate advisers and the Federal Environment Agency (UBA) suggest that the country’s goal of cutting greenhouse gas emissions by 65 precent by 2030 is likely to be missed. Before the Russian-Ukraine war, Germany was well on its way to a successful decarbonisation. In 2022, its carbon dioxide levels were 40 percent lower than the 1990 level. However, the scramble to ensure consumer energy security last year has meant the government has somewhat deprioritised its green transition. According to the analyses, the buildings sector could fall short of its 2030 target by 35 million tonnes of CO2, with the transport sector missing it by between 117 million and 191 million tonnes.
Within Germany, the shift to renewable energy is causing a political backlash, as consumers are facing higher energy prices and greater uncertainty. This has created a “greenlash”, encouraging many Germans to turn to right-wing political parties, such as the Alternative for Germany party.
On the European scale, there are fears that the ongoing energy and economic crises being faced in Germany could pull down other EU member states. Some are now referring to Germany as the “sick man of Europe” due to its ongoing poor economic performance, a gesture to its re-unification days. Eurozone growth was shown to be weaker than initially estimated for the second quarter of the year, with Eurostat decreasing its GDP estimate from 0.3 percent to 0.1 percent.
However, some are optimistic about Germany’s ability to rapidly adapt to new circumstances. Holger Schmieding, the economist who first called Germany the “sick man of Europe” in 1998, believes that there is too much pessimism around Germany’s economy at present. Its economy remains much stronger than in the 1990s, with high levels of employment. Last year, Germany rapidly responded to sanctions on Russian energy by developing a new LNG terminal in just a few months. In addition, its large number of small and medium-sized businesses are able to react “nimbly to a shifting competitive landscape,” according to Schmieding.