Why Germany Prioritizes Killing the Domestic Market to Boost Exports

The Economic Situation in Germany

Since 2021, the German economy has been showing a slower growth rate compared to the rest of Europe, with unpromising future prospects.
A glimmer of hope lies in private consumption, which, however, does not seem sufficient to boost an economy still heavily reliant on exports and threatened by the progressive tightening of the Chinese market.

Private Consumption and GDP Growth Forecasts

According to the forecasts of the Organisation for Economic Cooperation and Development (OECD), private consumption in Germany is expected to increase by 1% this year, while the overall Gross Domestic Product (GDP), hampered by modest public spending and a decline in private investments, will grow by less than 0.2%.
Minister of Economy, Robert Habeck, interpreted a “sign of slight recovery” last month, expressing hopes for an economic upturn.
However, household spending on durable goods such as washing machines, cars, or clothing will not be sufficient to mend a structurally deficitary economy.

Ageing Population and Economic Growth

The ageing population in Germany will impact economic growth through labor shortages, pension funding, and escalating healthcare costs.
In 2000, there were 27 Germans aged 65 and above for every 100 individuals aged between 20 and 64.
That number rose to 38 last year and is projected to reach 50 by around 2035.

Trade as the Backbone of the German Economy

Trade remains the mainstay of the economy.
Exports were the sole contributing factor to growth last year, increasing by 0.6%, while the overall GDP shrunk by 0.1%, according to OECD data.
Germany recorded a trade surplus of nearly 210 billion euros last year, still 10% below its pre-pandemic 2019 level but significantly higher than the 88 billion euros recorded in 2022.

Trade with China declined last year as the Chinese economy struggled with local government debt, a real estate bubble, and subdued consumption.
The United States became Germany’s top trading partner in December, but Berlin still registered a small trade surplus of 2.5 billion euros with China.

Challenges and Future Scenarios

Germany faces challenges such as the loss of key economic pillars like cheap Russian energy following Moscow’s invasion of Ukraine in 2022.
The country may be tempted to delay the feared loss of another key market – China – for its automobile and industrial goods exports.
Concerns have been raised by BMW and Volkswagen executives regarding the European Commission’s stance on Chinese subsidies.

Analysts suggest that Germany stands to lose significantly from a disruption in trade relations with China.
In a severe scenario of a sudden halt in all exchanges with Beijing, Germany’s GDP would plummet by 3.5% to 5% in the first year.
A more gradual decoupling would lead to a long-term GDP decline of just over 1%.
A softer “de-risking” strategy, involving the gradual disentanglement of trade ties in limited critical sectors, would cause a blow of less than 1% to the GDP.

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