Deep in crisis
Recession, falling production, rising insolvency: bleak prospects for the German economy in the new year. The damage is aggravated by US rivalry and economic warfare against Russia and China.
BERLIN (own report) - The German economy has started the new year in a desolate state. The outlook for the near future is not good in view of further setbacks expected from the escalating disputes with the United States and China. Analysing the data, experts estimate that German economic output in 2024 shrank for the second year in a row and expect the downward trend to continue in 2025. This will be a first in the economic history of the Federal Republic of Germany. Investment has seen record declines. And industrial production is estimated to have shrunk by three per cent last year. The only area of growth in the economy is insolvencies. Three major projects worth billions were supposed to secure Germany’s position as a world leader in key future technologies – semiconductors and state-of-the-art batteries, including an Intel chip factory – but have failed. What is more, if US president-elect Donald Trump does impose crippling additional tariffs on imports from Germany after taking office on 20 January, Germany’s export industries will face severe setbacks in their most important market. Despite the dire outlook, Germany and the European Union are still expanding a painful economic war against China.
Recession and bankruptcy
The outlook for the German economy at the start of a new year is dismal. Official figures on GDP for 2024 are not yet available. According to calculations by the Handelsblatt Research Institute (HRI), however, German economic output, which had already shrunk by 0.3 per cent in 2023, declined again in 2024 by 0.2 per cent. For 2025, the HRI expects further shrinkage of around 0.1 per cent. In the history of the Federal Republic of Germany this would be the first time that the economy has failed to grow at all over three consecutive years.[1] The HRI forecast is that “gross fixed capital formation, which is crucial for innovation and growth, ... will also continue to shrink” and in 2026 will arrive at the level recorded at the end of 2016. Handelsblatt states, “There have never been five years of shrinking investment in the Federal Republic of Germany since data series began in 1960.” In one field there is growth: company insolvencies are rising sharply, with around 22,400 registered last year, a good tenth more than in 2023.[2] The number of major bankruptcies filed by companies with an annual turnover of over ten million euros even increased by 30 per cent to 364. Experts do not rule out the increase in insolvency cases matching the level seen during the 2008/09 financial crisis, i.e. up 32,000.
Slump in production
There is also a serious fall in output. According to preliminary calculations made by the Federation of German Industries (BDI) in November, a drop of 3 per cent can be expected for the past year, said to be “the third year in a row with declining figures”.[3] The BDI expects production output to fall again in 2025. Year-on-year, domestic car production just managed to hold steady, reaching the previous year’s figure of 4.1 million vehicles. However, over the course of last year there was a downward trend. The December figure was 10 per cent below December 2023.[4] The German Engineering Federation (VDMA) reckons with “an 8 per cent drop in production in real terms” in 2024 compared to the previous year and, looking to 2025,forecasts a further, albeit slightly smaller, decline of around two per cent.[5] Chemicals, the third biggest industrial sector in Germany, has also been badly hit. Although the production of basic chemicals increased by 8 per cent in 2024, this came on the back of a roughly 25 per cent slump during 2022 and 2023. So chemical industry output was, as a whole, still 17 per cent below the 2018 volume.[6] For 2025, the industry expects to see an increase of, at best, 0.5 per cent.
Failed high-tech projects
While the German economy finds itself in a deep structural crisis, three ambitious projects were launched to make German industry a world leader again. Yet all of these major investments in key sunrise sectors are on the verge of collapse. The US company Intel, for example, planned to build a big state-of-the-art semiconductor plant in Magdeburg. The German government pledged ten billion euros of the total cost projection, which is in excess of thirty billion euros. However, Intel has since got into difficulties, and CEO Patrick Gelsinger, who had negotiated the investment and subsidies, has recently been forced to step down. In September, construction was already put on hold for two years, and analysts now believe that Donald Trump’s election victory makes it even less likely that the factory will ever be built.[7] In October, the US chip manufacturer Wolfspeed, in collaboration with automotive supplier ZF, finally cancelled plans to build a factory for the production of silicon carbide semiconductors in Ensdorf, Saarland.[8] Thirdly, there was a grand scheme advanced by Swedish battery manufacturer Northvolt to build a state-of-the-art factory in Heide, northern Germany. Those plans have also been dropped. In fact, Northvolt, whose largest shareholder is VW, is now involved in US insolvency proceedings.[9]
Transatlantic battles
While “previous periods of macroeconomic weakness,” as Handelsblatt notes, would usually be soon overcome as “foreign demand picks up”, and stronger exports would “then lead to rising investment and income at home,”[10] this scenario is not in sight. On the contrary, the largest market for German companies is the United States, where the policies of the new administration in Washington from 20 January may prove disastrous for German companies. President-elect Donald Trump may well carry out his threat to impose across-the-board tariffs of 10 per cent, and in the event of conflict very possibly 20 per cent, on all imports, including those from Germany. Analysis of the data by the Cologne-based Institute for Economic Research (IW) says the German economy would then face losses of up to 180 billion euros in over the period 2025 to 2028. Germany’s GDP would fall by 1.5 per cent in 2027 and 2028. As IW Director Michael Hüther explains, “It would be a catastrophe for Germany as a leading exporter.”[11] As the data hardens, the fears of decline are essentially being confirmed for individual sectors. The already crisis-ridden automotive industry, for instance, cannot expect any respite.[12]
Expensive economic wars
It is against this background that Berlin and Brussels are taking major steps towards an economic war against China. Last year, the EU decided to impose heavy tariffs on import of electric cars from China.[13] It is also applying comprehensive sanctions against companies from the People’s Republic accused of supplying the Russian defence industry.[14] Beijing has responded by imposed some initial restrictions on the export of important raw materials and is now considering constraints on the export of technologies needed to manufacture state-of-the-art batteries.[15] Any new widening of this tariff and sanctions battle may cause some damage to Chinese industry but it will most certainly hit an already reeling German industry hard. The current economic crisis facing Germany is to a great extent caused by policy decisions as the West ramps up its sanctions on Russia. This economic war has meant, among other things, the end of low-cost Russian gas, which deprives German industry, especially the chemicals sector, of an underlying competitive advantage. By escalating the economic war with China, Berlin is potentially only exacerbating the long-term economic damage.
[1] Dennis Huchzermeier, Bernhard Köster, Axel Schrinner: Bundesrepublik vor längster Rezession der Geschichte. handelsblatt.com 01.01.2025.
[2] Michael Scheppe: Experten rechnen mit Firmenpleiten auf Finanzkrisen-Niveau. handelsblatt.com 07.01.2025.
[3] BDI erwartet großes Produktionsminus. handelsblatt.com 22.11.2024.
[4] Pkw-Markt in Deutschland 2024: Elektro-Produktion mit neuem Rekord – massiver Einbruch bei E-Zulassungen. vda.de 05.01.2025.
[5] Julia Dusold: Produktionsminus: Maschinenbau fordert politische Kehrtwende. produktion.de 10.12.2024.
[6] VCI zieht Bilanz für Pharma- und Chemieproduktion 2024. chemieproduktion-online.de 16.12.2024.
[7] IWH: Intel-Magdeburg nach Trump-Sieg unwahrscheinlich. n-tv.de 08.11.2024. See also: Scheiternde High-Tech-Projekte.
[8] Chipfabrik von Wolfspeed und ZF steht vor dem Aus. Frankfurter Allgemeine Zeitung 23.10.2024.
[9] Gustav Theile, Benjamin Wagener, Christian Müßgens, Niklas Záboji: Gescheiterter Batterie-Traum. Frankfurter Allgemeine Zeitung 07.12.2024.
[10] Dennis Huchzermeier, Bernhard Köster, Axel Schrinner: Bundesrepublik vor längster Rezession der Geschichte. handelsblatt.com 01.01.2025.
[11] Thomas Obst, Samina Sultan, Jürgen Matthes: Was droht den transatlantischen Handelsbeziehungen unter Trump 2.0? Von Zollerhöhungen und Vergeltungsmaßnahmen. IW-Report 42/2024. Köln, 24.10.2024. See: Die transatlantische Rivalität.
[12] Martin Hesse: Trump-Zölle gefährden 25.000 Jobs. spiegel.de 20.12.2024.
[13] See: Auf dem Weg in die Strafzollschlacht (II).
[14] Huileng Tan, Romanus Otte: EU verhängt erstmals Sanktionen gegen Putin-Komplizen in China – und schließt Häfen für 52 russische Schatten-Tanker. businessinsider.de 17.12.2024.
[15] Lu Yutong, Han Wei: China to Restrict Exports of Lithium Battery Technologies. caixinglobal.com 03.01.2025. See also: China’s second counterstrike.
