Declining competitiveness and challenges ahead for German economy

PFR Analysis Office analyst Andrzej Kochman noted in a report on the German economy made available to PAP that Germany's GDP in the fourth quarter of 2023 decreased by 0.2 percent, the entire year 2023 ended with likely a slightly negative GDP growth.

Kochman pointed out that the economic sentiment indicators for the German industry suggest a deterioration in the situation. He added that "sentiments regarding a potential improvement in 2024 are low".

According to the PFR analyst, the main reasons for the difficulties in the German industry include "the cost of energy and decreasing competitiveness of their industry". As an example of Germany's declining competitiveness, he pointed to the automotive industry, which could impede economic recovery.

Regarding exports, Kochman suggested that after the setbacks caused by COVID-19 and the war in Ukraine, there is hope that global economic uncertainty will reduce, leading to a rise in global demand and, consequently, an increase in demand for German export goods. Nonetheless, there's a risk due to the fact that Germany's export mechanism previously relied heavily on the combustion engine automotive industry, and the ongoing shift towards electromobility means that the traditional industry is transitioning towards electric vehicles - he highlighted.

At this juncture, Germany's previous advantage in global markets is not so definitive – he added.

Kochman observed that there was some recovery in the German automotive industry, but the volume prior to the pandemic has not been achieved.

Among other issues in Germany, Kochman identified supply chain disruptions and also low domestic demand, although he indicated that "due to falling inflation, which is expected to lead to an increase in real wages, a gradual recovery in this area is forecasted". Another significant challenge is the ageing population and the shortage of skilled workforce.

Some argue that the German government is not doing enough to boost the economy. It's expected that by the second half of 2024, the effects of the special fund for the Bundeswehr aimed at modernizing the German army will begin to show, possibly stimulating the economy – told PAP the PFR analyst.

He also mentioned that the forecasts for the German economy in 2025 are not encouraging. It is currently believed that the recovery might be limited in 2025 due to a court ruling that restricted the government's ability to fund energy transition efforts. The ongoing situation in Ukraine and Russia adds to the uncertainty. The state of affairs makes engaging in business with Russia increasingly complex – said Kochman.