Germany flag Germany: Economic and Political Overview

The economic context of Germany

Economic Indicators

Germany is the top economic power in Europe and the fourth globally. Nevertheless, the country was severely affected by the consequences of the Russia-Ukraine conflict: prior to the invasion, Germany was highly dependent on Russian gas, oil and coal, with around one-third of its primary energy supply coming from Russia. After growing 1.8% in 2022, Germany’s GDP contracted by an estimated 0.5% in 2023 (IMF, -0.3% as per the EU Commission figures) as industrial production extended its downturn in Q3, following a sluggish first half of the year. Furthermore, elevated inflation eroded purchasing power, adversely affecting private consumption, while export volumes contracted as economic conditions weakened in Germany's primary trading partners. The country anticipates a modest recovery in 2024: the resurgence is expected to be fueled by increased growth in the domestic consumer services sector, while the manufacturing sector's outlook hinges on foreign demand. Despite persistent supply chain challenges, their impact has notably diminished in 2023 and is projected to have only a limited effect on production in 2024. Furthermore, Germany is not foreseen to encounter an energy crisis during the winter of 2023-2024, in contrast to the preceding year. Overall, the IMF forecasts growth at 0.9% this year and 2% in 2025. In terms of demand, the revival is expected to stem from personal consumption, constituting 52% of GDP (Coface), as a result of the wage increase determined by the collective bargaining agreements reached in early 2023.

The unprecedented measures taken to fight the pandemic and stabilise the economy, followed by several energy support packages, drove an increase in Germany’s budget deficit in recent years. The IMF estimated the federal government deficit at 2.4% of GDP in 2023 (from 2.1% one year earlier). In 2024, the government deficit is anticipated to decrease to 1.1% of GDP (1.6% as per the EU Commission). Besides the discontinuation of energy-related measures, fiscal consolidation will be aided by robust growth in government revenue. However, several tax initiatives, including addressing 'tax bracket creep', boosting child allowances, and supporting companies for growth, will negatively impact government revenue. The 2025 projection foresees a further reduction in the government deficit to 0.6% of GDP (IMF). Nevertheless, the Supreme Court's November decision regarding the Climate and Transformation Fund (KTF) could potentially impact the utilization of other special funds, which might necessitate additional financing for their spending plans through increased revenues and cuts in other areas, potentially resulting in further fiscal tightening. The national debt brake was reinstated in 2023 after suspension during 2020-2022 (when the debt-to-GDP ratio stood at 66.1%), with the ratio decreasing to 65.9%. Overall, government debt is expected to gradually decrease over the forecast horizon, to around 59.9% by 2026 (IMF). After peaking in 2022, annual inflation decelerated steadily over the past year, with an overall level estimated at 6.3% by the IMF. The reduction was primarily influenced by the fall in wholesale energy prices and the implementation of energy measures. Looking ahead, the slowdown in inflation is expected to persist, though at a slower pace, reaching 3.5% in 2024 and 2.2% the following year. Temporary support for inflation, particularly in the services sector, is anticipated due to ongoing wage growth. Concurrently, the role of energy price growth should play a relatively minor role. Decreasing inflation and rising wages should support real incomes and private consumption over the forecast horizon.

Unemployment was estimated at 3.3% in 2023 (IMF), up from 3.1% one year earlier, with wage growth averaging 6.1% on an annual basis in the first semester. The IMF forecasts unemployment to remain at its current level in 2024, before easing to 3.1% in 2025. To tackle shortages in skilled labor, the OECD recommends enhancing work incentives for women, older individuals, and those with lower incomes, which could be achieved through improving training and adult learning programs and simplifying the recognition of qualifications for migrants and refugees. With a GDP per capita (PPP) of USD 66,038, Germany is among the wealthiest countries in the world (IMF, 2023). Nevertheless, according to data by Destatis, around 20.9% of the country's population is at risk of poverty or social exclusion: in 2022, 14.7% of the population was at risk of poverty, 6.1% was affected by severe material and social deprivation, and 9.7% was living in a household with very low work intensity.

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 4,085.684,457.374,591.104,772.264,941.65
GDP (Constant Prices, Annual % Change) 1.8-0.30.21.31.5
GDP per Capita (USD) 48,75652,72754,29156,43958,472
General Government Balance (in % of GDP) -2.2-1.9-0.9-0.8-0.7
General Government Gross Debt (in % of GDP) 66.164.363.762.361.0
Inflation Rate (%) 8.76.02.42.02.0
Unemployment Rate (% of the Labour Force) 3.13.03.33.13.0
Current Account (billions USD) 180.15303.20321.72329.07324.34
Current Account (in % of GDP) 4.46.87.06.96.6

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

The German agricultural sector is rather limited: it contributes a mere 0.9% of GDP and employs 1% of the country’s workforce (World Bank, latest data available). To sustain a population exceeding 200 million farm animals, approximately 50% of the agricultural landscape consists of grasslands and arable land designated for feeding purposes. The primary production areas within the agricultural sector, intended for human consumption, encompass not only animal products but also bread cereals, potatoes, sugar beets, oilseeds, fruits, and vegetables. Additionally, specific areas of grassland and crops are allocated for the production of bioenergy and bioresources. According to the national statistical office Destatis, in Germany there are around 262,776 agricultural holdings, of which the majority are sole proprietorships, meaning that most farmers run their businesses alone or with their families. In recent years, the number of holdings dedicated to organic farming has been growing steadily, reaching 26,133. The total agricultural used area amounts to 16.6 million hectars, with an average size of 63.2 hectars (Destatis). Over the period between 2007 and 2022, agricultural output in Germany grew by 9.1% (EU Commission). In 2022, almost 14,2% of the total output value of the EU's agricultural industry came from Germany (EUR 76.2 billion – Eurostat). The country’s value of agricultural output increased by 30% year-on-year, although the value rise was mostly fuelled by price surge.

The industrial sector amounts to about 26.9% of GDP and employs 28% of the country’s workforce. Germany is Europe's most industrialized country, and its economy is well diversified: the automotive industry is the country’s largest sector, but Germany also retains other specialized sectors, including mechanical engineering, electric and electronic equipment, and chemical products. Overall, manufacturing activities alone account for 18% of GDP. The industrial activity is concentrated mainly in the states of Baden-Württemberg and North Rhine-Westphalia, where there are more than half of the 1,600 German manufacturing companies identified as global market leaders. According to the latest data available from BDI, in the first nine months of 2023, industrial production was down by 1% on the same period one year earlier. In the manufacturing sector, the output for the period between January and September 2023 experienced a year-on-year decline of 0.2%. Examining specific industries, notable growth was observed in vehicle production (up 14.4%) and other transport equipment (up 8.5%). However, more modest growth rates were recorded in the electro industry (up 2.8%) and machinery manufacturing (up 0.5%). Notably, energy-intensive industries significantly reduced production rates, with the chemical industry, paper industry, glass, and ceramics all registering reductions of over 14% compared to the same period one year earlier. The decline was less pronounced in metal production and processing (-3.3%).

Germany’s service sector is a leading employer (71% of the workforce) and contributes to 62.7% of the country’s GDP. The sector’s growth in recent years has been primarily driven by a strong demand for business-related services and by the development of new technologies, which contributed to establishing whole new branches in the tertiary sector. The accommodation and food services sector also plays an important role, with a total turnover worth EUR 104 billion (Destatis). Germany’s banking system comprises three pillars: private commercial banks, public-sector banks, and cooperative banks. The segment with the largest share of assets in the banking system is comprised of privately owned commercial banks, constituting approximately 40% of the total assets, whereas cooperative banks account for around 12% (European Banking Federation).
Overall, the German economic model relies heavily on a dense network of small and medium-sized enterprises (SMEs), often very open to the international environment: according to the latest data from Destatis, around 56% of the total employed persons work in SMEs, with the proportion of persons employed in micro-enterprises amounting to 18%, while 21% work in small and 17% in medium-sized enterprises.

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 1.3 27.6 71.1
Value Added (in % of GDP) 1.1 26.7 62.7
Value Added (Annual % Change) -4.6 -0.5 2.8

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
72,5/100
World Rank:
29
Regional Rank:
16


 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
8.31/10
World Rank:
5/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Country Risk

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Latest Update: July 2024