The country, which had been considered to be Europe's economic powerhouse in prior decades, became the worst-performing major economy globally in 2023 with a 0.3% contraction, followed by minimal growth in 2024 leaning on recession.
Several economists, business figures, and other experts expressed concern that Germany's economic downturn could cause the nation to reclaim its reputation as the "sick man of Europe" from the 1990s.
[4][5] This decline was attributed to multiple factors: A lack of urgency in diversifying its energy supply before 2022 leading to increased energy prices (coinciding factors include the Russian invasion of Ukraine, its nuclear power phase-out, slow pace of energy transition, and increased cost of fossil fuels),[6] comparatively lower productivity due to slow adaptation of digital technologies,[7] German politics (specifically the debt brake, the CDU/CSU-filed application to the Federal Constitutional Court successfully deeming a €60 billion climate fund unconstitutional as well as the subsequent in-fighting within the governing Scholz cabinet) obstructing economic stimuli,[8] global shifts in demand hurting the country's export-led economy while its higher internal real wage growth-led demand is delayed due to high cost of living,[9] as well as a skilled worker shortage arising from demographic challenges such as population ageing, low participation of women in the workforce and slowing immigration to Germany.
[19] In September 2022, German Economy Minister Robert Habeck accused the United States and other "friendly" natural gas supplier nations that they had been profiting from the Russo-Ukrainian war with "astronomical prices".
Economists pointed primarily to Western sanctions of Russia following its invasion of Ukraine, resulting in Germany being separated from a large portion of its energy supply made of cheap Russian natural gas.
[2] Beginning on 15 November 2023, a federal budget crisis for the 2024 fiscal year began when Germany's constitutional court ruled that the traffic light coalition government's €60 billion climate fund was unconstitutional.
This fund, crucial to the coalition agreement and Germany's climate and energy transition plans, had been created by appropriating leftover emergency debt from COVID-19 pandemic relief measures.
Previous governments had found ways to work around it, including creating special funds for refugee costs in 2017 and suspending the rule during the COVID-19 pandemic and in response to the Ukraine war.
[28] In April 2024, the ifo Institute, a prominent economic research center in Munich, reported that over half (55.2%) of the companies in Germany's residential construction sector cited a lack of orders.
It noted that increasing rates of inflation and higher borrowing costs forced many businesses to cease or delay projects, impacting capital investments and hiring decisions.
Hamburg Commercial Bank's Chief Economist Dr. Cyrus de la Rubia noted, "The recession in Germany's manufacturing sector deepened in August, with no recovery in sight."
[30] Deutsche Bahn, Germany's national railway operator, agreed to sell its logistics subsidiary, Schenker, to Danish competitor DSV for approximately €14 billion.
This crisis was not limited to lower-income groups but increasingly impacted the middle class, leading Scholz to describe housing as Germany's most pressing social issue.
[30] German industry associations expressed concern that the crisis could create a domino effect of widespread economic damage by deterring crucial skilled workers from abroad from Germany's labor market, while also potentially pushing voters towards political extremes.
[21] German GDP declined by 0.4% from October to the end of December 2022 due to the energy crisis brought on by sanctions against Russian gas and significant price increases.
Key issues identified as hindering Germany's economic performance included the declining competitiveness of German industry over the preceding decade, excessive bureaucracy and regulatory burdens, the need for digitization in government agencies, and a skilled worker shortage.
[6] Another factor cited was Germany's phasing out of its established network of nuclear power, a process initiated and led by The Greens and ultimately enforced by the Second Merkel cabinet.
[22] Some experts argued that Germany's economic troubles were partly due to its slow adaptation to technological advancements and shifting to low-productivity sectors, contributing to declining productivity.
[3] In addition, arguing and lack of compromise among Scholz's three-way traffic light coalition further hindered efforts to stimulate the economy and contributed to the government's record low numbers of support in polls.
[33] In addition, supply chain disruptions caused by geopolitical events such as Houthi attacks on maritime shipments amid the Red Sea crisis impacted the German industrial sector.
Economists stated that unlike countries with a dominant economic hub, Germany lacked a standout city that typically attracts concentrated foreign investment, preventing growth in housing demand and in construction sectors.
[30] Several bosses of German construction companies reported that despite there being a pertinent housing shortage in several German cities such as Berlin, that building new homes was "practically impossible" due to approval taking long amounts of time, costly noise and heating regulations, and governmental ignorance of how to solve issues in housing shortages and aid construction work.
This situation was partly attributed to past political decisions, including the sale of thousands of government-owned apartments to private investors and a drastic reduction in social housing construction by local governments.
[2] The International Monetary Fund posited that while weakness in Germany's economy could be attributed to multiple temporary factors such as consumer cutbacks due to inflation, interest rate hikes by the European Central Bank, and its restructuring of global demand from manufactured goods following the COVID-19 pandemic, that fundamental structural challenges were significant contributors to economic struggles, including accelerating population aging.
[2] The IMF recommended that Germany make efforts to expand labor force participation, particularly among women, by improving childcare access and reducing secondary earners taxes in married couples.
[2] The German education system also showed signs of decline, with estimates suggesting that falling math skills could cost the economy about €14 trillion in output by the end of the century.
[34] In 2021, the Social Democratic Party (SPD) led by Scholz achieved unexpected success in the federal election, with particularly strong results in the eastern state of Brandenburg.
[33] Concurrently, a new political force emerged: the Sahra Wagenknecht Alliance (BSW), self-described as "left-conservative" party that campaigned on platforms that included abandoning climate goals, halting military aid for Ukraine, and reducing immigration levels.
[35] The German DAX index underperformed compared to other major eurozone indices, resulting in associated European companies such as MTU Aero Engines, Qiagen NV, and Siemens Energy, experiencing notable declines in their stock prices.
Markus Krebber, the CEO of RWE, noted that while Europe had similar intentions to incentivize manufacturing, it lacked the comprehensive policy measures seen in the U.S., hence his decision to expand the business to the U.S. with a $15 billion investment plan.