Germany’s sluggish economy prompts nationwide soul-searching

IMF forecasts show most EU economies to expand this year while that of Germany is set to contract

Shoppers in central Berlin, Germany. A weak economy has prompted a bout of introspection across much of the country.

German angst traditionally had its heyday in the late 19th and early 20th century among anxious composers, poets and thinkers. This week, though, Germany’s federal economic minister Robert Habeck, himself a part-time philosopher, revived its spectre by claiming the country’s sluggish performance is less reality than perception.

It’s certainly an original claim, given the International Monetary Fund (IMF) revised down its forecast for Germany’s economy to -0.3 per cent this year. That compares to an optimistic 0.4 per cent growth forecast from Habeck’s own ministry.

News that every other European economy in the IMF report is set to grow in 2023 – just not Germany’s – has triggered widespread soul-searching in Berlin and beyond. And swift intervention by Mr Habeck.

“The data are not good, you can’t get around that, but there is no need for German angst,” said Mr Habeck on public television, citing special factors for the economic shrinkage. German industry is grappling with higher energy prices as the country races to replace Russian energy, he said, while its export-dependent economy is particularly sensitive to markets where, at present, nervousness and rising interest rates means firms are not investing.


For critics of Mr Habeck and Berlin’s so-called traffic light coalition, however, the IMF report is just the latest indication of how much is wrong with Europe’s largest economy.

Munich’s influential Ifo economic institute has flagged the third consecutive slump in its business confidence survey of 9,000 managers. Things are particularly bad in the construction sector, it noted, where rising costs and a fall-off in both customers and building permits have created the bleakest mood since the crisis year 2010.

For Ifo chief economist Klaus Wohlrabe, Germany’s winter recession has gone into extra time this summer – with no sign of a turnaround looming in the autumn. “Firms are able to meet existing orders better because the delivery shortages are reducing,” said Dr Wohlrabe, “but fewer new orders are following.”

Some predictions are even more dire, with the word “deindustrialisation” doing the rounds of conservative think tanks and political circles. The source of their gloom: an analysis of investment inflows and outflows from the business-friendly IW economic institute. It showed net investment outflows of €125 billion in 2022 – the highest ever value recorded.

A closer looks at OECD figures reveals only €10.5 billion was invested in Germany last year, with a notable collapse of cash from European neighbours. The IW analysis blames high energy prices, US anti-inflation measures, a growing struggle to find skilled workers – and high labour costs when employers find them.

Even as Tesla announced plans to double its Brandenburg plant capacity, making it Germany’s biggest, the IW report sounds the alarm for the country’s literal and figurative engine. “With the disappearance of the internal combustion engine,” it noted, “the German economy is losing an important unique selling point for its key industry.”

The opposition Christian Democratic Union (CDU) has been all over the bad news, demanding Social Democrat (SPD) chancellor Olaf Scholz and his administration tackle high corporate taxes, excessive bureaucracy and a creaking infrastructure.

That, in turn, has prompted howls of derision from even CDU-friendly conservative media outlets. On Thursday newspaper Die Welt noted how – after a two-year angst-filled recession in the early 2000s – Germany’s last reform push began and ended with its last SPD chancellor Gerhard Schröder.

Germany is struggling due to twin challenges of Ukraine war and climate transformation, it argued, but also the reform-free 16-year rule of CDU chancellor Angela Merkel. “She said she thought through everything from the end point,” said Die Welt, “but will go down in history as the chancellor with the worst possible self-image.”