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‘Turning point’: Is Germany’s ailing economy on the road to recovery?

The German government slightly increased its 2024 growth forecast Wednesday, saying there were signs Europe's beleaguered top economy was at a "turning point" after battling through a period of weakness.

Published: 24 April 2024 17:53 CEST

'Turning point': Is Germany's ailing economy on the road to recovery?

Skyscrapers in the German financial capital of Frankfurt. Photo: picture alliance/dpa | Frank Rumpenhorst

Output is expected to expand 0.3 percent this year, the economy ministry said, up from a prediction of 0.2 percent in February.

The slightly rosier picture comes after improvements in key indicators — from factory output to business activity — boosted hopes a recovery may be getting under way.

The German economy shrank slightly last year, hit by soaring inflation, a manufacturing slowdown and weakness in trading partners, and has acted as a major drag on the 20-nation eurozone.

But releasing its latest projections, the economy ministry said in a statement there were growing indications of a “turning point”.

“Signs of an economic upturn have increased significantly, especially in recent weeks,” Economy Minister Robert Habeck said at a press conference.

The ministry also cut its forecast for inflation this year to 2.4 percent, from a previous prediction of 2.8 percent, and sees the figure falling below two percent next year.

“The fall in inflation will lead to consumer demand — people have more money in their wallets again, and will spend this money,” said Habeck.

“So purchasing power is increasing, real wages are rising and this will contribute to a domestic economic recovery.”

Energy prices — which surged after Russia’s 2022 invasion of Ukraine — had also fallen and supply chain woes had eased, he added.

Several months ago there had been expectations of a strong rebound in 2024, with forecasts of growth above one percent, but these were dialled back at the start of the year as the economy continued to languish.

‘Germany has fallen behind’

But improving signs have fuelled hopes the lumbering economy — while not about to break into a sprint — may at least be getting back on its feet.

On Wednesday a closely-watched survey from the Ifo institute showed business sentiment rising for a third consecutive month in April, and more strongly than expected.

A key purchasing managers’ index survey this week showed that business activity in Germany had picked up.

And last week the central bank, the Bundesbank, forecast the economy would expand slightly in the first quarter, dodging a recession, after earlier predicting a contraction.

German Economics Minister Robert Habeck

Economics Minister Robert Habeck (Greens) presents the latest economic forecasts at a press conference in Berlin on Wednesday, April 24th. Photo: picture alliance/dpa | Michael Kappeler

Despite the economy’s improving prospects, growth of 0.3 percent is still slower than other developed economies and below past rates, and officials fret it is unlikely to pick up fast in the years ahead.

Habeck has repeatedly stressed solutions are needed for deep-rooted problems facing Germany, from an ageing population to labour shortages and a transition towards greener industries that is moving too slowly.

“Germany has fallen behind other countries in terms of competitiveness,” he said. “We still have a lot to do — we have to roll up our sleeves.”

Already facing turbulence from pandemic-related supply chain woes, the German economy’s problems deepened dramatically when Russia invaded Ukraine and slashed supplies of gas, hitting the country’s crucial manufacturers hard.

While the energy shock has faded, continued weakness in trading partners such as China, widespread strikes in recent months and higher eurozone interest rates have all prolonged the pain.

The European Central Bank has signalled it could start cutting borrowing costs in June, which would boost the eurozone.

But Habeck stressed that care was still needed as, despite the expectations of imminent easing, “tight monetary policy has not yet been lifted.”

In addition, disagreements in Chancellor Olaf Scholz’s three-party ruling coalition are hindering efforts to reignite growth, critics say.

This week the pro-business FDP party, a coalition partner, faced an angry backlash from Scholz’s SPD when it presented a 12-point plan for an “economic turnaround”, including deep cuts to state benefits.

Christian Lindner, the fiscally hawkish FDP finance minister, welcomed signs of “stabilisation” in the economic forecasts but stressed that projected medium-term growth was “too low to sustainably finance our state”.

“There are no arguments for postponing the economic turnaround,” he added.

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INTERVIEW: 'Failed climate policies are fuelling far-right politics in Germany'

It’s understood that far-right and populist political parties tend to either downplay the realities of climate change, or block progressive policies that would try to mitigate its impacts. But the link between failed climate policies and the recent rise of populist parties is rarely addressed.

Speaking as a panellist at the Green Tech Festival in Berlin on Thursday, climate policy thought-leader Sandrine Dixson-Declève voiced concern that poor climate and economic policies are fuelling the popularity of far-right politics in Germany and across Europe.

Co-president of the Club of Rome, Dixson-Declève works to promote policies that she believes would help secure a sustainable future for humanity. Such policies are laid out in the book Earth for All: A Survival Guide for Humanity, that she co-authored.

The Local spoke with Sandrine Dixson-Declève about Germany’s climate policy failures, and why she thinks the upcoming European elections are of the utmost importance.

The shortcomings of Germany’s ‘Energiewende’ had serious political consequences

Having been a contributor and advisor to Germany’s Energiewende (energy transition), Dixson-Declève has followed German politics and environmental policy for years.

“I believe that one of the biggest mistakes was that we politicised energy policy in Germany from the outset,” she told The Local, adding, “Merkel actually accepted the big green push to pull out of nuclear, which actually created a big mess.”

Germany’s anti-nuclear energy movement dates back to the 19070s, and led to the foundation of the Green party. Under Merkel’s leadership, a plan was adopted to phase out nuclear power with the last three nuclear power plants taken offline in 2023.

But losing nuclear power as an energy source came with some serious consequences.

“The first big mess was the continued burning of coal,” Dixson-Declève explained. “The second big mess was Nord Stream 2, and that led to the invasion of Ukraine…because it gave Putin power.”

Still, she wouldn’t suggest that Germany try to revive its nuclear power now: “I believe that Germany needs to really think through the next steps.”

Protestors run past riot police

A wave of protestors break through police lines at Lützerath. Open pit coal mining in west Germany destroyed most of the Hambach Forest, as well as dozens of villages such as Lützerath. At both sites massive citizen protests were met with brutal police evictions. Photo by Paul Krantz.

Energy efficiency is the missing piece to Germany’s climate plans

How to build up renewable energy infrastructure is at the centre of most discourse around curbing fossil fuel use, but using the energy we have more efficiently arguably deserves more immediate attention.

“The other missing link, which no one talks about, is energy efficiency,” Dixson-Declève said. “Actually the best energy is the energy you don’t use. That is unsexy, and that is why energy efficiency hasn’t been taken up the way it should have been since 2010.”

While working on climate and energy plans in 2010, she says she came across a study that said Europe could wean itself off of Russian gas just by putting energy efficiency requirements in place for buildings.

In 2022 the European Commission finally began to take this idea seriously when Germany and Europe suddenly needed to replace Russian gas imports, following Russia’s invasion of Ukraine.

Another massive energy saver that has been politicised for all the wrong reasons in Germany is heat pumps.

According to Eurostat data, about half of all energy consumed in the EU is used for heating and cooling, and most of that energy comes from fossil fuels. Heat pumps are significantly more efficient than boilers and allow for greater use of renewable energy sources.

But when Economy Minister Robert Habeck led an effort to promote heat pumps by banning new fossil-powered heating systems, conservative and far-right parties jumped on the issue as if it were an attack on personal freedoms.

“As environmentalists, we need to get better at translating the environmental narrative into something that resonates with people,” said Dixson-Declève.

A unified coalition government that is serious about climate protections might have better communicated to people that heat pumps would ultimately save them money: “They should have been enabled in a way that truly assisted people in getting the heat that they needed in an affordable way at the right time.”

‘I am very scared we are in a 1930s moment’

Whereas the coalition government has largely failed to communicate to voters how environmental policies will improve their lives and save them money, conservative and far-right parties have done extremely well at hijacking the narrative.

The European People’s Party (EPP – the EU’s largest conservative party), for example, is particularly adept at using citizens’ economic concerns to block environmental policies.

Having analysed the EPP’s manifestos, Dixson-Declève notes that they acknowledge the need to mitigate climate change, but say that protections cannot cost.

“I think the EPP has done a very good job both of putting in fear of the greens, [as if] they’re only going to think about green climate policies and not about social policies [whereas] we’re here to think about you.”

Sandrine Dixson-Declève with Earth for All

Sandrine Dixson-Declève holds up a copy of the book ‘Earth for All’ alongside two of the book’s co-authors. Photo: picture alliance/dpa | Wolfgang Kumm

Germany’s far-right parties tend to use similar messaging to try and convince voters that they will better improve the lives of citizens than the current coalition parties have.

Nearly 100 years ago, the National Socialist (Nazi) party succeeded in drumming up major support along similar lines.

Speaking as a panellist at Berlin’s Green Tech Festival, when asked how she thought European politicians were doing on climate issues, Dixson-Declève described them as deer in the headlights, adding, “I am very scared we are in a 1930s moment”.

“I think that in the 1930s we didn’t see Hitler coming, we didn’t read the tea leaves,” she told The Local, adding that in the present moment, “people are suffering. When people suffer, they look to anything, any message that’s going to make them feel like that next leader is going to help them.”

She also suggests that we can’t count on the youth vote to save us, citing Argentina and Portugal as two places where young voters have actually pushed politics to the right recently.

“This is a tipping moment politically, and if we’re not careful, it could explode in our faces,” said Dixson-Declève. “We need to get as many people to vote this year [as possible]. It’s an absolutely fundamental vote, alongside the United States, in order to make sure that we don’t slide to the right across Europe.”

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