“Germany is struggling. It was the only G7 economy to shrink last year and is set to be the group’s slowest-growing economy again this year.” These are the opening words of a blog by members of the IMF’s European Department published on March 27. According to the IMF, its GDP per head shrank 1 per cent between 2019 and 2023. This was the 34th-worst outcome out of 41 high-income economies. Of G7 economies, only Canada did worse. Even the UK, with a decline of 0.2 per cent, and France, with a small rise of 0.4 per cent, did better. The US rise of 6 per cent was in another league.

If Germany has recently been a sick man, is this a temporary or a chronic condition? There are good reasons for arguing it is mainly the former. As the blog notes, Germany’s terms of trade deteriorated hugely after Russia’s invasion of Ukraine, as the price of natural gas soared. But the terms of trade have returned to 2018 levels as the price of natural gas fell once again. The concomitant spike in inflation has reversed and ECB monetary policy has started to ease. Finally, the post-pandemic rebalancing of global demand from manufactured goods towards services was also unfavourable for Germany’s economy. But this, too, is set to reverse.

The IMF adds that concerns for the longer-term future of German industry are exaggerated. Yes, energy-intensive industries have contracted, but they only account for 4 per cent of the economy. Automobile production, by contrast, rose 11 per cent in 2023, while electric vehicle exports rose 60 per cent. Moreover, it adds, “manufacturing value-added has remained steady even as industrial production has fallen”.