Where does the German growth weakness come from?

Last Updated: 1. Februar 2024By

Germany has been performing poorly in terms of gross domestic product (GDP) among western industrialized countries. In the group of G7 countries, Germany has consistently ranked second to last in recent years (ahead of Japan).

Where does Germany’s growth weakness come from? But now we are the only country with negative growth. What are the reasons for this and what are the consequences for investors?

As for the cause, the president of the Federal Association of German Employers‘ Associations, Rainer Dulger, has a clear view. It is due to the failed policies of the coalition government.

There is no relief for businesses, no planning security, and no predictability – instead, there is excessive bureaucracy, increasing regulations, and reporting obligations. This has led to less investment.

In the past year, GDP shrank by 0.3 percent – the first time since the COVID-19 year of 2020. No other major industrialized country performed worse than Germany in 2023. Projections by many experts and economic associations have also been recently revised downwards for this year.

Dulger called for the competitiveness of Germany as a business location to be put back at the center of political action. Employees in companies should keep more of their gross income. The welfare state needs to be restructured.

Austerity measures continue to burden growth The prestigious IFO Institute shares a similar view. Because the coalition government cannot handle money, the Federal Constitutional Court has effectively rejected the budget, and now there is suddenly a need for austerity, the burdens in the form of increased taxes and spending cuts are negatively impacting growth.

Due to the government’s austerity measures, the IFO Institute has lowered its economic forecast. It now expects only 0.7 percent growth in 2024, instead of the 0.9 percent it predicted in mid-December.

I bet that this forecast will soon become obsolete as well. The noticeable weakness of our most important trading partner, China (for which the government is not to blame), is likely to contribute to this.

Wrong policies lead to wrong incentives The underlying cause of Germany’s growth weakness as the only G7 country seems to be the wrong policies that create the wrong incentives or even hinder growth. This includes excessive bureaucracy and high costs.