A Cloud above the German Economy
By admin November 4, 2014

German economy in decline

From April to June of this year the German economy shrank by 0.2%. Economists predict that this decline will continue, meaning that the country is facing a recession. Some economists believe that the economy will not turn around until the middle of 2015. The decline of the German economy not only worries investors in Germany, but also puts a cloud over a broader recovery of the European region that has been relying, to a large degree, on Germany.


The German economy has been mainly export-oriented. Its current-account surplus has averaged nearly 7% of the GDP since 2006 and reached a new peak of 7.5% in 2013 due to a boom in its power exports. However, the number fell by 6% in August. Buyers of German exports come from mainly the other European countries along with the recent emergence of China. Even though the rest of the Euro’s economy has been declining, German exporters have been adaptable by taking advantage of the demand in high-investing emerging markets for the machinery and transport goods that German firms excel at producing.


There are three main factors that led to the fall of German’s exports: China’s economy slowing down, Russia’s economic crisis, and Energiewende (Renewable energy). China’s GDP growth has decreased about 3% since 2010 and the country is rebalancing away from investment and focusing on domestic consumption. These actions hurt the German economy as 6% of German exports went to China. Now with declining demand from China, German exports declined, especially in terms of capital goods such as machinery. Also with China’s rebalancing policy, there has been a decrease in foreign direct investments from China to Germany. In addition, Russia who previously accounted for 3% of German exports has declined its demand this year. Furthermore, due to the nuclear disaster in Fukushima, the German government is cutting back on nuclear power resulting in yet another sector with declining exports. Instead, Germany tries to rely on renewable resources, which are more expensive. As a result of the high price in the energy sector, firms are now relocating. For instance, BMW moved a factory from Germany to America where energy prices are 80% lower. If these underlying factors continue to affect the German economy, Germany could see a continuous felling of exports by 1-2%. Germany will have to adapt to these changes with prompt reform, otherwise its influence will spread throughout Europe.


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