I. Introduction
The study of Germany’s economy is crucial, as it has long been regarded as one of the most developed among advanced capitalist nations. Until recently, it was hailed as a successful export-led growth model and ranked as the fourth-largest economy globally and the largest in the European Union (EU) in terms of GDP. However, in recent years, Germany’s economic trajectory has faced significant challenges.
This paper critically examines the country’s economic decline based on key macroeconomic indicators and economic policies that have disproportionately favoured large corporations and elites at the expense of workers and low-income groups. The neoliberal policies adopted in the 1980s have contributed to deepening socio-economic disparities, rising unemployment, economic uncertainty, and environmental challenges (Siddiqui, 2024a).
Germany, once the symbol of capitalist success, has not experienced substantial economic growth over the past three years. Investment and employment have been in decline, eroding its status as Europe’s economic powerhouse. While Germany remains the fifth-largest economy in the world and the largest in Europe, its economic downturn raises concerns about its long-term stability (Eddy, 2024).
II. Deepening Crisis in Germany
Adding to these challenges, Germany faces external economic pressures, particularly from U.S. trade policies. The country’s trade surplus with the United States reached a record €65 billion (£54.7 billion) by the end of 2024, making it a likely target for tariffs imposed by Donald Trump’s administration. Furthermore, the German government is under increasing pressure to boost defence spending in response to Trump’s demands on NATO allies. This has led to indications that decarbonization policies may take a backseat to efforts aimed at supporting struggling industries.
Economists have warned that Germany’s economy is in “permanent crisis mode.” The Handelsblatt Research Institute has described the current downturn as the “greatest crisis in post-war history,” projecting a third consecutive year of recession in 2025 (Wolf, 2024).
The ongoing crisis has weakened labour demand and reduced job vacancies, particularly impacting key industries such as automotive manufacturing. Volkswagen, for example, has undertaken significant cost-cutting measures in response to declining demand. Government statistics reveal that Germany’s economy contracted for the second consecutive year in 2024, shrinking by 0.2%, following a 0.3% contraction in 2023 (IMF, 2025).
These figures highlight a troubling economic slowdown, with recessionary trends continuing into 2025. As Germany navigates these challenges, its economic policies and strategic responses will play a crucial role in determining its future trajectory.
The International Monetary Fund (IMF), in its World Economic Outlook (2025), forecasts a decline in global inflation to 4.2% in 2025 and 3.5% in 2026. Additionally, the IMF projects that Germany’s economy will experience a modest recovery by the end of 2025 and into 2026. However, this growth is expected to remain below the historical 2000–2019 average of 3.7%.
Despite these projections, the IMF report overlooks critical structural challenges facing the German economy. Notably, real wages have been declining relative to rising labour productivity, negatively impacting household incomes, domestic demand, and consumption. Furthermore, increasing competition from China and East Asia poses a significant threat to Germany’s export markets, which could have serious long-term consequences for its export-driven economy (Siddiqui, 2024b).
The IMF study (2025) also projects that the U.S. economy will grow by 2.1% in 2026, while the Eurozone is expected to expand by just 1.1% in the same year. Germany’s overall GDP growth is forecasted at 1.1% in 2026, a stark decline compared to the 3.6% growth recorded in 2021. Figure 1a illustrates Germany’s GDP growth trends and projections through 2029. And Figure 1b provides an overview of long-term growth trends from 1965 to 2022. Figure 1c highlights the particularly bleak outlook for 2025, with Germany’s GDP growth expected to be the lowest among major economies at just 0.3%.
Similarly, Table 1 presents the IMF’s economic forecasts for major capitalist economies in 2025 and 2026, offering little cause for optimism. Per capita income data further underscores Germany’s economic struggles—after experiencing a sharp decline in 2008, income levels recovered by 2013, only to fall again in 2021, even before the onset of the Russia-Ukraine war (Figure 2). Among major capitalist economies, Japan has recorded the worst long-term performance (Siddiqui, 2015).
Given these grim forecasts, it is difficult to foresee a strong economic recovery in the coming years. Moreover, Germany’s economic slowdown will not only impact its domestic population but also have broader implications for the global economy.
Figure 1a: Germany: Growth Rate of the Real Gross Domestic Product (GDP) from 2019 to 2029.
Figure 1b: Germany GDP Growth Rate 1961-2025
Figure 1c: Real GDP Growth (%) Forecasts for Advanced Capitalist Economies
Table 1: Economic Growth Rates of Advanced Capitalist Countries Projections
Figure 2: GDP per capita in Advanced Economies Between 2000 and 2024 in PPP ($).
Among macroeconomic indicators, capital investment is a crucial variable to examine, as changes in investment levels directly impact economic growth rates, employment, productivity, and incomes (Siddiqui, 2023). In Germany, capital investment as a percentage of GDP hit its lowest point in 2008 before gradually increasing. However, since 2022, it has once again started to decline, as illustrated in Figure 3.
Additionally, the ongoing recession has led to a slowdown in labour force growth across all major advanced capitalist economies. However, in Germany, this decline has been particularly sharp (see Figure 4).
Figure 3: Germany: Capital investment as Percentage of GDP.
Figure 4: Decline in Labor Force Growth in Advanced Capitalist Economies, 2019-23 to 2025-29 (percentage points)
Figure 5: Germany Trade to GDP Ratio 1970-2025
III. Trade and Its Impact on Germany’s Economy
Trade is a crucial economic variable for analysis, particularly for Germany, which has long been highly dependent on international trade. Over the years, trade steadily increased, but since 2022, it has declined, as illustrated in Figure 5.
Germany is the second-largest exporter in the world, with exports accounting for more than one-third of national output. The export of high-value-added products has been the primary driver of economic growth in recent years (Siddiqui, 2018). Trade, measured as the sum of exports and imports of goods and services as a share of GDP, has fluctuated: Germany’s trade-to-GDP ratio for 2023 was 90.11%, reflecting a 9.77% decline from 2022. In 2022, the trade-to-GDP ratio stood at 99.88%, marking a 10.72% increase from 2021 (Wolf, 2024).
Germany’s economy has faced significant trade disruptions due to geopolitical and structural challenges. The Russia-Ukraine war has led to severe energy supply cuts, particularly in oil and gas, resulting in higher energy costs (Siddiqui, 2022a). Additionally, economic sanctions imposed on Russia by the U.S. and the EU have severely impacted German exports, particularly in the automobile sector, where manufacturing exports to Russia have disappeared.
Germany’s heavy reliance on energy left it vulnerable, as the country was slow to diversify its energy supply before 2022. The phase-out of nuclear power, combined with rising global energy costs, further exacerbated price increases for German industries. Moreover, Germany’s export-led economy has suffered due to global shifts in demand and an inability to adapt quickly to digital technologies, affecting its productivity.
The large manufacturing sector, a key pillar of Germany’s economy, has been disproportionately affected by the surge in energy prices following Russia’s invasion of Ukraine three years ago. At the same time, German manufacturers face increasing competition from China, particularly in the automotive industry (Siddiqui, 2020).
Germany’s three major automakers—Volkswagen, Mercedes-Benz, and BMW—are grappling with rising costs as they transition from internal combustion engine vehicles to electric vehicles (EVs). This transition has become even more challenging as Chinese EV manufacturers, such as BYD, offer lower-cost alternatives, putting German automakers under significant pressure.
IV. Germany’s Economic Crisis and the Limits of Neoliberal Policy
The neoliberal approach to economic management, which relies heavily on monetary policy while sidelining fiscal measures, is often seen as the preferred strategy for combating recessions. However, this approach is likely to fail because it does not challenge the status quo or impose sacrifices on the ruling elites and large corporations, which have long benefited from tax cuts. Instead of expanding domestic consumption and demand, this policy continues to prioritize export-led growth, making Germany vulnerable to external economic fluctuations.
The European Central Bank (ECB) is expected to cut interest rates aggressively this year, more so than other developed economies. However, monetary policy alone may not be sufficient to stimulate growth. One alternative would be to eliminate the “debt brake”, a fiscal rule imposed in 2009 in response to the global financial crisis. This restriction limits the German government from running a structural budget deficit of more than 0.35% of GDP per year, thereby constraining public investment and spending.
Germany’s economic downturn intensified in 2024. In the first half of the year, the economy contracted by 0.2% compared to the same period in 2023. Several key factors contributed to this decline: Weak domestic and foreign demand for manufactured goods. High economic uncertainty, discouraging investment in equipment. Labor shortages and declining demand in the construction sector. Increased household savings, as low consumer confidence led to restrained spending
Despite a rise in real disposable income, private consumption failed to support economic growth. However, with lower inflation expected in 2025, real household incomes are projected to recover, leading to a gradual increase in private consumption, albeit at a slow pace.
The economic crisis has also taken a toll on the labour market: Labour demand weakened, and job vacancies fell by 23%—dropping to 1.3 million between 2023 and 2024. Job creation stagnated, leading to a rise in unemployment, which increased by 0.5 percentage points to 3.5% by the end of 2024.
Looking ahead, the deterioration of the labour market is expected to be contained as economic growth gradually resumes. Additionally, Germany’s ageing population will continue to weigh on labour supply, potentially limiting further job losses
A dominant perspective on Germany’s economic stability today comes from the Varieties of Capitalism (VoC) school, which has arguably become hegemonic in comparative political economy debates (Siddiqui, 2022b). This framework conceptualizes Germany as an ideal type of a Coordinated Market Economy (CME), in contrast to the Liberal Market Economy (LME) model exemplified by the United States.
The VoC approach theorizes national institutional systems in terms of economic complementarity—the positive interactions between institutions that reinforce firms’ competitive strategies. In LMEs, market-based institutions enable rapid adjustments, allowing firms to respond quickly to competitive pressures, reducing costs, and fostering innovation. In contrast, CMEs rely on non-market coordination, particularly in providing long-term capital investment (“patient capital”) and fostering industry-specific, non-transferable worker skills, which support sustained industrial competitiveness.
Germany’s financial sector has undergone significant liberalization, strengthened market forces while weakened traditional non-market coordination in economic governance. Notable changes include: The unwinding of cross-shareholding among corporations, particularly by banks and insurance companies. Relaxation of legal barriers against corporate takeovers, exposing firms to increased financial market pressures. A shift in major private banks towards investment banking—often with limited success. The rise of private equity firms and hedge funds, which have become increasingly influential in corporate governance.
These changes have made German companies more vulnerable to short-term value maximization strategies, particularly from activist investors and financial market fluctuations (Baccaro & Howell, 2017). The erosion of coordinated economic governance poses a fundamental challenge to Germany’s historical model of stability and long-term industrial strategy.
V. Challenges Facing Germany’s Industrial Sector
Since 2018, Germany’s industrial production has contracted by more than 12%, reflecting deep-seated structural challenges. Many of Germany’s leading industrial firms, including BMW, Mercedes-Benz, Volkswagen, and numerous automotive suppliers, chemical, and pharmaceutical companies, have significant investments in the United States. However, these companies rely heavily on exports from their U.S. operations, making them vulnerable to potential trade conflicts, particularly if U.S. President Donald Trump escalates tariff policies.
Germany’s economy is now experiencing a second consecutive year of zero growth, with industry leaders increasingly pessimistic about the economic outlook. The potential imposition of tariffs by the Trump administration is a major concern for German manufacturers. For instance, Bosch, Germany’s largest auto supplier, announced plans to cut 5,500 jobs starting in 2027, with more than two-thirds of these losses occurring in German factories (Eddy, 2024).
Several factors have exacerbated Germany’s economic difficulties, including: High energy prices, which have increased production costs. Declining public infrastructure investment, affecting business efficiency. Geopolitical instability, disrupting trade and supply chains. Amid these challenges, the current government has collapsed, prompting early elections on February 23. The outcome of this election will determine whether new leadership can implement policies to revive Germany’s industrial sector and restore economic growth.
VI. Germany No Longer the World’s Leading Exporter
For decades, Germany’s export-led growth model followed a straightforward formula: import raw materials and components at competitive prices, leverage German engineering expertise and affordable energy, and transform them into high-value products proudly labeled “Made in Germany.” However, this model has been under increasing strain in recent years.
By 2024, it became evident to many policymakers that Germany’s macroeconomic framework—built on cheap energy and easily accessible export markets—was no longer sustainable. The country has been caught between cyclical downturns and deeper structural challenges, with manufacturing struggles and intensifying global competition, particularly from China, exposing long-term vulnerabilities.
Germany’s economic performance has continued to decline, making it the only G7 economy projected to contract in 2024. The economy is expected to shrink by 0.2% this year, down from earlier forecasts of 0.3% growth, following a 0.3% contraction in 2023. These figures highlight the country’s prolonged structural weaknesses, including an overreliance on manufacturing and growing pressure from foreign competitors.
According to the International Monetary Fund (IMF): “Germany’s GDP per capita shrank by 1% between 2019 and 2023, ranking 34th out of 41 high-income economies. Among G7 nations, only Canada performed worse. The UK saw a smaller decline of 0.2%, while France recorded a modest increase of 0.4%. Meanwhile, the U.S. economy grew by 6% over the same period, placing it in a league of its own.” (Wolf, 2024)
Germany’s terms of trade deteriorated significantly following Russia’s invasion of Ukraine, as natural gas prices soared, increasing production costs and damaging competitiveness. However, with natural gas prices returning to 2018 levels, some economic stabilization is expected in 2025—though whether this translates into sustained growth remains uncertain.
While energy-intensive industries in Germany have contracted, they account for only 4% of the economy, leaving automobile production to show more promising growth, with an 11% increase in 2023 and a 60% rise in electric vehicle exports. Despite falling industrial production, manufacturing value-added has remained steady, signalling those long-term structural issues, rather than temporary shocks, are driving the country’s economic challenges.
Germany faces a declining labour force, with a projected fall of 0.66 percentage points in the growth of its working-age population (ages 15-64) from 2025 to 2029, compared to the period between 2019 and 2023 (Wolf, 2024). This demographic shift poses significant challenges to economic sustainability, especially as labour shortages may exacerbate existing economic pressures.
VII. Neoliberal Policies and Their Consequences
The neoliberal push for privatization has resulted in the socialization of losses while privatizing profits. This process often involves public-private investment policies, such as buying up infrastructure and charging monopoly rents, which place an unfair burden on ordinary citizens who must pay for the use of these resources.
The rise of Donald Trump as U.S. President represents a significant shift in global politics, marking a collapse of the liberal centre and the growth of support for either Left-wing movements or extreme Right-wing (neo-fascist) ideologies, especially in contexts where trade unions are weak. The political philosophy underlying this shift can be traced back to classical liberalism, which emphasized the free market and opposed state intervention.
During the Great Depression of the 1930s, John Maynard Keynes demonstrated that laissez-faire capitalism failed to address widespread unemployment. He argued that state intervention was essential to boost aggregate demand and achieve full employment. Despite this, Keynesianism was never fully embraced by finance capital, which feared that any systemic intervention would undermine its dominance—especially that of financial capital.
The post-war economic boom in the U.S. and Western Europe was characterized by state intervention, which expanded aggregate demand and employment, although it also contributed to rising inflation from 1955-1972. Additionally, the decolonization process removed mechanisms that had previously kept commodity prices low, further complicating global economic dynamics. As inflation rose, neoliberalism emerged as a solution, promising to restore investor confidence and profitability by rolling back state intervention.
However, neoliberalism resulted in immense suffering for workers both in advanced capitalist countries and in the Global South. The growth rate of the world economy significantly slowed during the neoliberal era, and the 2008 financial crisis marked a particularly severe downturn. As monopoly capital faced increasing challenges, it shifted its support towards the Right-wing or neo-fascist movements in order to maintain its hegemonic control, further weakening the liberal centre and exacerbating the crisis of liberalism.
Donald Trump’s economic agenda appears to be focused on protecting the U.S. economy from foreign imports, not just from China, but also from the European Union. However, protectionism alone will not revive the U.S. economy. While it may encourage domestic production, it cannot expand the domestic market, which requires an expansion of state expenditure—financed either through fiscal deficits or by taxing the wealthy (see Figure 6). Without such measures, the protectionist policies will likely fall short of achieving long-term economic growth.
Figure 6: Public Investment in Germany, gross public investment as a share of GDP, 2018-22 (%)
VIII. Conclusion
Over the past three decades, as finance became dominant in Germany and other advanced capitalist countries, corporate investment behaviour increasingly shifted toward a shareholder-value orientation. Remuneration schemes based on short-term profitability directed management’s focus toward shareholders’ objectives. Unregulated financial markets further favoured asset purchases over asset creation, undermining long-term growth prospects (Siddiqui, 2023).
Under capitalism, the decline in the labour share and stagnant real wages have been sources of a realization crisis for the system. Profits can only be realized if there is enough effective demand for the goods and services produced. However, stagnant wages harm consumption, as spending from profit income tends to be lower than that from wages. This reduction in demand diminishes investment incentives, as capital spending depends on the demand for the products that capital produces. In Germany, rising unemployment and the increased reliance on market forces have led to greater poverty and inequality.
For example, government policies that aimed to drive down wages in the name of global competition replaced the previous unemployment insurance system with the punitive Arbeitslosengeld II. This law effectively removed social security protections after twelve months, leaving individuals with nothing after paying into the system, a stark shift toward workfare.
It is clear that the export-led growth model in Germany has failed. It has not reduced income inequality, protected jobs, or safeguarded the environment. The country’s massive structural savings surpluses, which finance its current account surpluses, are hailed by mainstream economists as evidence of international competitiveness. However, this view is misleading. For the global economy to function, savings and investment must balance. If one country saves more than it invests, other countries must absorb the difference, often accumulating debt. Therefore, Germany’s trade surpluses must be reduced to raise output, trade, and employment in deficit countries.
The solution is for Germany to use its surplus savings to address its low public investment levels. This can be done by allowing the government to borrow from domestic markets and invest more in the country’s infrastructure. Additionally, raising wages and improving incomes for low-income groups would boost aggregate demand and consumption. Over the past twenty-five years, net public investment has been near zero, leading to a consistent decline in the ratio of public capital to GDP. It is nonsensical for a country with substantial surplus savings not to use them to boost domestic consumption and generate demand, benefiting both Germany and the Eurozone.
In summary, it has become evident that capitalism in Germany has failed as a social system. It no longer provides jobs or social security to the people. The economy is mired in stagnation, financialization, and inequality, accompanied by rising unemployment and social unrest. Liberal democracy is on the verge of collapse, with the rise of fascism and other regressive ideologies such as patriarchy, racism, imperialism, and war. These trends are not confined to Germany; they are visible in other advanced capitalist countries as well, where investment stagnation is often punctuated by financial bubbles under the guise of the free market (Siddiqui, 2024c). Despite rising productivity, real wages for most workers in Germany have barely increased in recent decades.
As Karl Marx wrote, “Humanity inevitably sets itself only such tasks as it is able to solve, since closer examination will always show that the problem itself arises only when the material conditions for its solution are already present or at least in the course of formation” (Siddiqui, 2025). The solutions to Germany’s crises lie in the economic, social, and ecological realms. These require rational regulation between human beings and nature, under the control of an associated humanity—one that regenerates and maintains the vital processes of healthy ecosystems at the local, regional, and global levels, ultimately achieving human development and sustainability.
About the Author
Dr. Kalim Siddiqui is an economist specializing in International Political Economy, Development Economics, Trade and Economic Policy. Since 1989, he has been teaching economics at various universities in Norway and the UK. Dr. Siddiqui’s research interests encompass a wide range of topics, including political economy, international trade, and economic history, South Asia, and emerging economies. He has presented papers at international conferences across numerous countries, reflecting his global engagement in the field. His scholarly pursuits span six broad domains: Political Economy, Development Economics, Economic History, Economic Policy, Globalization, and International Trade. Dr. Siddiqui has made significant contributions to research in areas such as trade policy, globalization, and political economy. His work has been published in chapters of edited books and articles published in peer-reviewed journals. For inquiries, Dr. Siddiqui can be reached at: kalimsiddiqui567@outlook.com
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