German economy in a whirlpool
In the latest BSR Policy Briefing, author Michael Grömling writes about shocks and challenges facing the German economy. The past decade has raised new concerns that impact not only Germany but also the global economy. The corona pandemic, the war in Ukraine, demographic change and climate change will shape the direction of the economy.
“The” megatrends
“The German economy is experiencing its longest period of stagnation since the Second World War.” We are currently living in a weak global environment that is easily influenced by ongoing crises. Post pandemic world has been crucial to some factors. The recovery of the manufacturing, construction industry and service sector has been slow. The pandemic has led the world into global economic crisis and investment slump. It quickly unfolded as a combination of multiple supply and demand shocks, also, lockdown measures paralyzed the demand side.
The war in Ukraine instead has an impact through three transmission channels: 1. Cost shocks, including supply risks for energy and raw materials, as well as rising labor costs. 2. Demand for consumer and investment goods, with high inflation diminishing private household purchasing power and the global economy’s slowdown affecting foreign trade worldwide. 3. Geopolitical situation, where domestic production and consumption are influenced by input supply, energy availability, and imported consumer goods.
Germany’s economic position and structure
Germany is a major global equipment supplier. Its manufacturing industry has strong position internationally. The manufacturing base is unique in Europe. Germany is dominated by export of goods (80%) and only Japan and Italy have comparable figures. The focus is mostly on the high-end segment of medium-tech products, like vehicles and machinery.
The economic structure reflects diverse social, political, and economic influences. Evolving consumer preferences due to digitalization and climate change impact companies. Changing production methods affect what and how products are made. Emerging hybrid companies offering goods and services gain a competitive edge over international counterparts.
Globalization creates competition between domestic and international production. On the other hand, it opens new markets, which can have a positive effect on domestic productions. In addition to globalization technological changes also lead to structural changes. Digital revolution appears to be accelerating because of advancing innovations and the growing importance network.
Demographic and climate change
Alongside the pandemic and the Ukrainian war, two other significant trends emerge: demographics and climate. In 2023, Germany’s population reached 84,5 million, primarily bolstered by factors like the Ukrainian war. However, population structure is changing towards older people, which is a global phenomenon. This demographic change also affects to economic policy. Potential workforce (resident aged between 18 and 67) will decrease by more than 5 million people over the next ten years in Germany. The sectors that meet the demand of older people, like healthcare and social services, will probably have good opportunities in the future.
Earth’s temperature will continue to rise, leading to significant global challenges. Climate change directly impacts nature, resulting in various social and economic burdens. Extreme weather events can affect infrastructure, agriculture, and communities. Global demand for goods, solutions to problems, the production possibilities of companies and the structure of an economic location, will be affected by climate change. Changing climate conditions may trigger migration within and between countries, potentially causing serious social changes.
All these “megatrends” will affect to the structure of Germany’s economy now and in the future.
