- Germany, Europe’s largest economy, is facing an intensifying job crisis that threatens workforce stability and economic growth.
- The war in Ukraine has devastated Germany’s energy-intensive manufacturing industry.
- The energy crisis has deeply troubled the German economy, and its troubles still reflect much of its vulnerabilities given its dependence on Russian energy and steeply rising prices.
- The prospect of elections this February 2025 has induced political instability; hence, people are pessimistic about the country’s economic fortunes.
The manufacturing sector of Germany is its heartland. In current times, the German manufacturing sector is undergoing some hectic challenges. From being precise, efficient, and innovative, internal weakness, tough worldwide competition, and rapid technology advancements have stressed German manufacturing.
Germany’s manufacturing sector has been in uninterrupted contraction. The HCOB German Manufacturing Purchasing Managers’ Index, a barometer of sectoral health, has remained below the threshold of 50.0, indicating growth. In December 2024, the PMI dropped to 42.5, marking the sharpest decline in production and new orders in months. January 2025 saw slight improvements as the PMI increased to 44.1, but it still pointed to contraction. Intermediate and investment goods have dropped sharply. Factory orders continue to be soft. Employment in manufacturing continues to be in decline for the last 18 months. Improved supply chain efficiency and cheaper inputs provide comfort for some time. Confidence in the sector continues to be fragile due to political uncertainty, geopolitical tensions, and economic stagnation.
At the core, Germany’s automotive sector has taken a big hit. Volkswagen is badly going through low sales, greater competition due to the influx of foreign producers, and high costs that come with changing over to electric vehicles. The cost of changing over from internal combustion engines to EVs together with tough labor laws and the rather high production costs have made Volkswagen susceptible. German manufacturers are exposed to being overtaken in the market they once dominated. The war in Ukraine has devastated Germany’s energy-intensive manufacturing industry. The increase in energy costs has increased production costs in Germany and reduced competitiveness. Tensions with geopolitics and economic dependency on China have wrecked the sector.
Traditional German manufacturing sectors also suffer from this situation. The recent case of Grotrian-Steinweg, a 180-year-old piano manufacturer that has gone bankrupt due to strong Asian competitors and falling consumer spending, can be a symbol of this crisis. It was reported that from hundreds, German piano manufacturers now only had 14 companies remaining. Although some high-end brands could survive the fight, the main problem for the mass-market producers still stands. High production costs, a lagging EV transition, geopolitical uncertainties, and global competition have exposed the vulnerabilities of an industry that once symbolized excellence. Bold reforms, investments in innovation, and policies to reduce operational costs are essential for reviving the sector. Without strategic interventions, Germany risks losing its status as a global manufacturing leader.
Job Crisis Threatens Economy
Germany, Europe’s largest economy, is facing an intensifying job crisis that threatens workforce stability and economic growth. Labour shortages in critical sectors hinder progress, while layoffs and factory closures exacerbate instability. Germany is experiencing severe labour shortages. 50% of German companies can’t find employees to fill their open jobs. The building and manufacturing industries are at a higher loss as 53% and 54% of its companies reported unavailability of suitable labourers for employment. Such losses in inability to fill 1.8 million open jobs translate to over €90 billion value, which in itself is more than 2% of the GDP in Germany.
The layoffs are on the rise, but this time, especially in the manufacturing sector. The oldest steel pipe factory in Düsseldorf, which is 124 years old, has been shut down, leaving behind 1,600 employees. German chemical giants BASF SE and Lanxess AG are sacking people. Other giant companies such as Continental AG, Robert Bosch GmbH, Michelin, and Goodyear have shut factories and have initiated layoffs. Even the renewable energy sector is not spared. German solar panel manufacturers have a hard time competing with their Chinese counterparts. Job losses and relocation are consequences.
The job crisis has now entered the realm of politics. The city of Essen proposed a requirement that welfare recipients and asylum seekers must perform community service to continue receiving benefits. This could help fill labour gaps and cut welfare costs, but critics see it as marginalizing vulnerable groups. Germany’s dual crisis of labour shortages and layoffs requires urgent intervention. Workforce upskilling, reductions in energy and labour costs, and improved immigration processes are critical solutions. Structural problems cannot be resolved overnight, but Germany has the potential to stabilize its labour market and preserve its economic powerhouse status.
Unprecedented Energy Crisis
The energy crisis is another big issue for Germany. For a long time, Germany has been independent and smart in terms of energy resource management. Chancellor Angela Merkel has been in office since 2005, and during her early years, she concentrated on the development of non-renewable energy sources and nuclear reactors. But after the Fukushima nuclear disaster in 2011, Germany stopped using nuclear energy and started focusing on renewable energy.
The fact that Germany never fully concentrated on renewable energy sources was largely because of its heavy dependence on Russian energy. Officially, Germany imported around 40% of its energy from Russia, while unofficial estimates suggest that the number may be as high as 60%. The construction of the Nord Stream 1 and Nord Stream 2 pipelines further solidified this dependence. Germany had to import other sources of energy from countries like the United States, Qatar, and others at much higher costs following its government’s decision to halt the importation of Russian oil and gas after the Ukraine war. Today, the country is facing one of the biggest challenges in manufacturing operations due to the energy crisis. It is thus often said that without Russian energy, Germany’s heavy industry “flutters in the wind like an open flower”: The energy crisis has deeply troubled the German economy, and its troubles still reflect much of its vulnerabilities given its dependence on Russian energy and steeply rising prices.
Impact on the Upcoming Elections
The prospect of elections this February 2025 has induced political instability; hence, people are pessimistic about the country’s economic fortunes. Recent opinion polls have sharply indicated a downturn in investor optimism, indicating scepticism about the potential growth prospects in the country. It is the second consecutive year of economic contraction, with predictions suggesting that Germany is likely to lag behind the other major economies within the eurozone going forward. The political landscape also affects key sectors. For instance, the German auto sector has been calling for a more hardline economic posture to maintain the sector’s position in the world market, even as it fights off external shocks, particularly those coming from America. However, the election rhetoric is more inclined toward tax cuts and promises of increased spending, rather than looking at the deep structural economic reforms that would ensure sustainability.
Conclusion
In conclusion, the political atmosphere in Germany has played a significant role in its economic recession. The country’s future is dependent on how the elections play out and which party will dominate the government soon.
References:
- https://www.wsj.com/economy/trade/germany-economic-model-broken-exports-095a488d
- https://www.ft.com/content/87ac3c34-905d-4379-a108-366a5fd20e0c
- https://www.reuters.com/markets/europe/german-manufacturing-sector-mired-downturn-november-pmi-shows-2024-12-02/
- https://hir.harvard.edu/germanys-energy-crisis-europes-leading-economy-is-falling-behind/
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/germany-economic-woes-go-beyond-energy-crisis.html
- https://www.etmm-online.com/-german-manufacturing-challenges-reforms-a-6876149430cd057c42827824ee0fdddc/
- https://www.reuters.com/business/energy/germanys-scholz-welcomes-us-turnaround-energy-policy-handelsblatt-reports-2025-01-26/
- https://www.turn0news16.com
- https://www.bw24.de/baden-wuerttemberg/esslingen/an-familienunternehmen-aus-baden-wuerttemberg-kuendigt-massiven-stellenabbau-93524826.html
Aayush Pal is a freelance writer on contemporary geopolitical developments. The views expressed in his work are entirely his own.