Germany, which once depended heavily on Russian gas, was hit harder than other big European economies by the energy crisis caused by the Ukraine war, which sent a chill through energy-intensive industries.
As energy prices eased, ministers and economists hoped that the economy would stage a tentative recovery this year. But a steady stream of gloomy data over the past few months has darkened the outlook.
“The upswing has been delayed once again,” Habeck said.
Consumer demand remains depressed and companies are holding back on investments as concerns about an expansion of conflict in the Middle East and China’s growing competitive threat eat away at business confidence.
Political instability has not helped, with constant squabbling between the Social Democrats, Liberals and Greens in Chancellor Olaf Scholz’s shaky coalition and strong performances by far-right and far-left populist parties in elections in three east German states last month.
Some companies, complaining of high labour and energy costs, a big tax burden and political turbulence, are considering moving some production to cheaper countries, prompting fears about de-industrialisation in Europe’s largest economy.
But Habeck sounded a cautiously optimistic note, saying the economy would start to recover next year as lower inflation and easing interest rates combined with higher real wages drove higher consumer spending.
“In the past three to four quarters, people have become richer again,” he said.
The government is also hoping that its planned economic reforms will stimulate growth.
The package includes investment incentives, measures to encourage people to re-enter the labour market and reductions in electricity prices for some industrial companies.
Habeck’s ministry now believes the economy will expand 1.1% next year — slightly higher than its forecast from earlier this year — and by 1.6% in 2026, as private consumption and investment activity rebound and as international demand increases for industrial goods.
The Green politician acknowledged that the constant wrangling in Scholz’s government was not helping matters.
Exports ‘under attack’
But he insisted that Germany’s malaise lay much deeper.
Two pillars of the country’s success - cheap Russian gas and well-functioning global markets, critical for a leading exporter such as Germany - had been kicked away, the first by the Ukraine war and the second by a combination of China’s “aggressive export strategy” and the increasing protectionism of the US, he said.
“Half of Germany’s growth always came from exports, and this pillar... has come under attack,” he said. “We basically haven’t had any growth since 2018.”
Germany’s growth potential was also anaemic.
“Even if we do everything right, if we reduce bureaucracy and have the skilled workers and capital we need, we would only have the chance to grow 0.6%,” Habeck said.
That was because of “failures not of the past few years but of past decades”, he said, saying successive governments had failed to invest enough in infrastructure, digitisation and mobilising more skilled workers.
If Habeck’s prediction for this year proves accurate, Germany will experience its first two-year recession in more than 20 years after output shrank 0.3% in 2023.
In 2002, it contracted 0.2% and by 0.5% a year later.
Written by: Guy Chazan in Berlin
© Financial Times
