Germany used to be called the Powerhouse of Europe until a few years ago. That is no longer the case. The country’s economy is in doldrums and no government seems to know how to fix it. In fact, Germany may be on the way to becoming the sick man of Europe like it used to many decades ago. The automotive sector used to one of Germany’s flagship industries. However Germany auto firms failed to adopt to recent changes in the industry including the move towards EVs and are unable to compete with China’s auto firms. Instead of focusing on the economy the country is bogged down in dealing with issues such as illegal immigration on a daily basis.

Last last month I came across an article in The Guardian and Reuters on how the Spanish economy soared in 2024 with a GDP growth of 3.2%. The German economy on the other hand contracted in 2024 by 0.2% last year and this contraction was the second time in a row. A recent article at Syz Private Banking by Adrien Pichoud discussed the outcome of the elections in Germany last week and the difficulties facing the economy. One of the charts that stood out was how the GDP level has stood basically flat in the past 5 years:

Click to enlarge

Source: Germany: Friedrich Merz faces a difficult but essential challenge, Syz Private Banking

Below is a brief excerpt from the piece:

After a decade as Europe’s powerhouse, Germany has revived the spectrum of “the sick man of Europe” that it was a quarter of a century ago. Its economy has been contracting for two consecutive years in 2023 and 2024 and its GDP level stands at the same level as five years ago, while all other European economies have enjoyed positive growth since the end of the COVID era. A combination of external shocks, like lower Chinese demand, end of cheap Russian gas supply, plus rising interest rates and the lack of fiscal policy support, have all led to the dismal economic performance of the largest economy of the continent. In this context, the need for economic reforms designed to improve short and medium-term growth prospects is enormous and the new government will have to take swift action to revive a positive dynamic in the economy.

It remains to be if the new government by Friedrich Merz of the conservatives can set the course straight for the economy.

Related articles:

• Germany’s economy has gone from engine to anchor. Here’s what the next chancellor faces, Atlantic Council
• Four key economic policy issues for the next German government, Heinrich-Böll-Stiftung European Union​
• Germany’s economic woes go beyond the energy crisis, Vanguard
• Germany: how to make the economy great again, ING

Investors are betting on a revival of economic growth. The DAX index has performed well so far this year with a return of over 13% outperforming the S&P 500.

For a list of German stocks trading as ADRs on the US markets click here.