Why is the German economy expected to grow only 0.5 percentage points this year, while the US economy grows four times as much and the other industrialized countries around three times as much?

Anyone who asks this question will quickly hear a variety of answers. At the forefront: in Germany everything is expensive, but especially energy. Cheap Russian gas would have made Germany an export champion. And the end of profitable energy is also the end of Deutschland AG.

Only: That's not true at all. Economists at the International Monetary Fund (IMF) have questioned whether this classification is correct. Their analysis found that this narrative does not stand up to scrutiny. The bad news: There are deeper structural problems slowing Germany's economy.

Germany, export champion, still exists

“The increase in gas prices turned out to be temporary. After skyrocketing in 2022, wholesale gas prices have returned to 2018 levels,” the analysts write. They also add that some of the other frequently cited causes of weak growth have been exaggerated.

For example, the export surplus rose to 4.3 percent of gross domestic product, “below the excessive surpluses of the years before the pandemic, but above the average of the last two decades,” according to the evaluation of economists. So Germany, the export champion, still exists.

Germany is suffering much less than expected from deindustrialization

Economists say fears of deindustrialization are similarly exaggerated. “Energy-intensive industries such as chemicals, metals and paper have shrunk, but they only account for four percent of the economy. By contrast, automobile manufacturing grew by eleven percent last year.”

The industry also participates in the “green transition”. In 2023, electric car exports increased by 60 percent, according to the IMF analysis. Volkswagen and BMW alone accounted for a tenth of all electric car sales worldwide.

What's more: the manufacturing sector continues to focus on higher quality products. The conclusion is that the added value remains the same, even if industrial production falls. In other words: “Industrial production is a less useful indicator of the economy.”

No other country runs out of workers so quickly

But why is our economy slowing down? A combination of temporary and structural factors, economists say. High inflation has curbed consumption, while higher key interest rates have hit the construction industry and other interest-sensitive sectors. In general, the recovery of the global economy after the pandemic helped the service sector more than industry, which is unfavorable for Germany.

However, these factors are becoming less important. The bad news: “Structural headwinds, such as weak productivity growth, are likely to continue, while others, such as an aging population, will accelerate rapidly,” economists say. But economists have ready solutions.

“Now that the migration wave is ending and the boom generation is retiring, Germany's workforce will shrink faster than that of any other G7 country.” Fewer people will have to pay for more retirees, pension contributions will rise while payments will fall. In addition, the older population will demand even more health services, which will drive workers away from other sectors.

To counteract the decline in the workforce, IMF economists call for more migration. An alternative approach would be to get more women into work: “There are 2.3 million fewer women employed than men, and women are five times more likely to work only part-time,” the economists explain. More reliable child care and lower taxes for second earners could create incentives in this regard.

Municipalities plan money for investments and then do not spend it

Another way would be to increase productivity. Here Germany has been wearing out for too long: “Public investment in Germany has declined since the 1990s and has barely managed to compensate for the loss in value.” Germany ranks almost last among industrialized countries in terms of public investment.

Experts say budgeted money is often not even spent because municipalities lack the right employees. In this case, increasing planning capacities through consultations such as the German Association could help.

To increase public investment, Germany could also loosen the debt brake, an approach that has been debated among economists and national politicians for months. But the opportunity would be there, say IMF economists: “The debt brake could be relaxed by about one percent of GDP, and Germany's debt would continue to fall as a percentage of GDP.”

Obstacle bureaucracy

Finally, experts mention reducing bureaucracy to give more impetus to the economy. “For example, it takes five to six years to obtain a permit for a wind energy installation. And it takes 120 days to obtain a business license, more than double the OECD average.”

More digital government offerings could also speed up such processes. It starts with the smallest differences: “Only 43 percent of online government processes automatically fill in forms with personal data, while the EU average is 68 percent.”

Experts summarize that Germany faces significant economic challenges. But: the country also has the right policy levers to overcome this and ensure a bright economic future. “Now is the time to use these levers.”