Trends in Germany’s manufacturing industry and foreign trade after the pandemic
Germany is going through a challenging period – the impacts of the energy crisis and structural challenges, as well as cyclical weakness are giving rise to concerns about the “sick man of Europe”.[1] After an optimistic start to 2024, when energy-intensive industries also saw a recovery, hopes for a robust recovery faded again. The German economy’s unsatisfactory performance is a result of households’ still-low willingness to spend and appreciable fiscal restrictions, as well as German industry, in particular, which is lagging behind. This is because the recovery of the “German engine” is crucial for the economy as a whole. In the following text, we will therefore focus on the main trends in Germany’s manufacturing industry and foreign trade. We will analyse in detail the territorial and commodity structure and relations with domestic and European industrial production. It turns out that German industry is strongly intertwined with European production, with no significant specialisation in terms of either sectors or trading partners. It was able to cope with the end of gas supplies from Russia and geopolitical changes, but increasing Chinese competition, persisting high prices for energy, especially gas, and a lag in information technology will require a fundamental revision of Germany’s growth model. However, Europe as a whole is facing major challenges, as shown by the long-awaited analysis by Mario Draghi on the direction of European competitiveness.
- Published in Global Economic Outlook – October 2024 (pdf, 1.8 MB)
Germany’s foreign trade in goods
Germany is currently the third largest exporter in the world, behind China and the USA. Germany’s share in world trade[2] dropped to 6.6% in 2022, from 7.3% in 2021. China again finished in top position with a 14.4% share, but this represented a fall from 15.0% in 2021. The United States strengthened its second position, with a share of 8.3%, up from 7.9% in 2021. Germany remains one of the most open G7 economies, with a foreign trade turnover of close to 100% of GDP.[3] However, trade with EU countries accounts for a larger proportion of German trade – intra-EU trade comprised 55% of Germany’s total foreign trade in 2022. China was Germany’s most important trading partner, with a total turnover of EUR 254.4 billion in 2023.[4]
Sector diversity in Germany’s foreign trade in goods is visible in both the import and export components (Chart 1). In both cases, motor vehicles and mechanical engineering, which have a significant weight particularly on the export side, play a key role. Other key segments of German foreign trade include chemicals, computer technology and pharmaceutical products. Basic products, such as plastics and metals, also have some weight; in imports it is also fuels such as oil and natural gas. Germany’s foreign trade is therefore not concentrated in just a few sectors, but is spread across a wide range of industrial sectors.
Chart 1 – Germany’s foreign trade in 2023
(EUR billions)
Source: Destatis
Note: Volume in 2023, GP19 classification in two-digit breakdown, for the ten largest categories of goods and Other.
From a territorial point of view, Germany’s foreign trade has changed, mainly as a result of geopolitical events such as Russia’s invasion of Ukraine. However, China’s global position is also changing. Germany’s trade links with the United States have recently strengthened significantly, making the USA, together with China, the most important trading partners. According to data from the German Federal Statistical Office, the USA even exceeded China as Germany’s main trading partner in the first quarter of this year. German exports to the USA now accounts for around 10% of the total volume, whereas China’s share fell below 6%. In addition to cyclical influences (robust demand in the USA and a slowdown in China), structural and geopolitical factors are also playing a role. German firms often produce locally in China instead of importing to the Chinese market, which reduces the need for exports from Germany. At the same time, Chinese firms have improved the quality of their products significantly and become leading players in some sectors, jeopardising the competitiveness of German producers. The global market shares of German firms have not fallen dramatically yet,[5] but China’s penetration of new markets is very dynamic.
However, trade relations with partners in the European Union are stable. Among European territories, which are no less important for Germany, France, Italy, the Netherlands, Austria, Poland and the Czech Republic posted high trade figures. Last year, the volume of imports from Poland and the Czech Republic was comparable with that from China. For a further analysis of German imports, we indulged in a little simplification, focusing on the most important partners and key trading groups. In reality, the commodity structure of German foreign trade is very diverse (the significant grey contribution of the other groups in Chart 1).[6]
A closer look at German imports
Germany’s imports from key partner countries in the European Union are characterised by a different structure of commodity groups compared to goods imported from the United States and China. Chart 2 presents import volumes in billions of euros in 2023, with the four most important product groups identified for each trading partner. In the case of the Czech Republic, Poland and Hungary, trade in cars and their accessories dominates, followed by other important categories such as refrigerating and HVAC equipment, accumulators and batteries. There is also considerable sale in Germany of furniture and electrical engineering products that come from Central European economies. France, Italy and Austria are also intensively involved in the European automotive industry, both for finished cars and their components. Unlike Central European economies, these countries also export pharmaceutical products and steel to Germany. Germany mostly imports commodities from the Netherlands and the USA, such as oil and gas, as well as pharmaceutical products. Electronic components, mainly chips, computers and related products, come from China, while imports of cars and their accessories from this country are minimal. “Aircraft and space ships” are a specific item and seems to reflect trade with one French and one US aircraft producer.
Chart 2 – Imports to Germany by most important groups and territories – detailed breakdown
(EUR billions)
Source: Destatis
Note: Annual volumes in 2023, GP19 classification in four-digit breakdown, for the nine largest importers, for the four most important commodity groups for each trading partner (excluding “Exceptions” and “Unspecified”).
The similarity in the commodity structure of imports for selected territories was confirmed by a cluster analysis. A cluster analysis, which looks for algorithmically similar phenomena, was applied in the GP19 classification (Güterverzeichnis für Produktionsstatistiken, 2019 version)[7] in a two-digit breakdown. Historical links, geo-economic factors and industrial specialisation affect business models between Germany and its main trading partners. Similarity at the level of European partners also reflects the degree of integration of the European single market. The results of the analysis confirmed the relative similarity in the structure of imports from the Czech Republic and Poland to Germany, although the cluster analysis placed Hungary closer to other eastern EU countries (Romania and Slovakia). The cluster analysis also revealed a significantly similar pattern of imports from western countries, such as France and Italy.
Key production chains across sectors confirm deep industrial connectivity within Europe. One of the most obvious is the automotive industry and its accessories, which makes up a significant segment of production and exports in many European countries. This is related to the production of electrical engineering components and metal materials, which are also crucial for the wider engineering industry. The involvement of Central European countries in the production of heat pumps shows how the green transformation of the German economy is opening up new opportunities for suppliers from these countries. By contrast, their exports of iron are small, as processing, for example into cast iron products, is already taking place in the relevant countries. Paradoxically, exports from Central European economies therefore have a higher degree of processing than from selected western partners, where trade in raw materials persists, possibly for historical reasons (remember the European Coal and Steel Community).
Germany as an industrial power of European significance[8]
German production is dominated by motor vehicles and associated production (Chart 3). Mechanical engineering is a similarly important sector in production and foreign trade. Together with the automotive industry, it accounts for more than one-third of German production (see Table 3 in Annex 1). In addition to these sectors, however, the production of chemicals, plastics, metals and metal products plays an important role. These energy-intensive industries, although an important part of domestic production, do not have such a strong international trade dimension. Germany is therefore not focused primarily on mechanical engineering, as some of the media comments would indicate.
Chart 3 – Manufacturing production
(EUR billions)
Source: Destatis
Note: Annual production volume in 2023, manufacturing sector, two-digit GP19 classification, for the 10 largest commodity groups and Other.
The decline in industrial production in Germany last year was due to trends in energy-intensive sectors. The five industrial sectors with the highest energy consumption, which include the manufacturing of chemical products, metal products, glass and ceramic products, the processing of stone and earth, and the production of paper and coke, were particularly affected. In 2021, these sectors together consumed 77% of the total industrial energy consumption in Germany, accounting for only 17% of gross industrial value added. Since the beginning of 2022, there has been an almost continuous decline in production in these energy-intensive sectors, with the result that their performance has been significantly weaker than industry as a whole.[9] However, by the end of 2023 gas prices declined, giving some relief to these energy-intensive sectors. Their production is therefore only 13% lower than at the beginning of 2022, confirming some stabilisation in these sectors.
However, a decline in activity was also apparent in two key industrial sectors in Germany – the automotive and mechanical engineering sectors. Over the last two years, car production was hit by supply chain difficulties and delayed orders from the pandemic periods, but order books gradually emptied during the second half of 2023. Given the dynamics of orders, this trend was expected and was confirmed by a German Ifo institute survey. By contrast, mechanical engineering saw a slow but persistent decline in output, which was not as strongly caused by problems with supplies of components and parts as was the case in the automotive sector.
According to the industrial production index, trends in German industry indeed gave rise to major concerns among financial analysts over the last year (Chart 4). However, gross value added in industry did not fall dramatically. The largest losses in output were suffered by lower value-added segments (the energy-intensive sectors). However, last year’s adverse trends reversed in the first quarter of 2024 and activity in industry started to rise again. The positive start to the year did not continue and German industry returned to stagnation.
Chart 4 – Industrial production and gross value added in German manufacturing
(index 100 = 2019)
Source: Eurostat
Note: Seasonally and calendar adjusted; quarterly averages of monthly data for industrial production.
However, the decline in activity hit the whole of European industry, which is strongly intercorrelated. As Chart 5 shows,[10] the correlation between month-on-month movements in industrial production is particularly strong in Germany (DE), France (FR), Belgium (BE) and Italy (IT). The supplementary axis of Austria (AT), the Czech Republic (CZ) and Poland (PL) is interesting. On the contrary, trends in Ireland (IE) were markedly isolated from the rest of the euro area, as this economy is strongly focused on the technological and pharmaceutical sectors. The synchronised movements in industrial production are due mainly to intermediate goods,[11] but the production of capital goods in large euro area countries (Germany and France, in particular) is also significantly aligned. Given the linked nature of European industry, all major euro area countries saw a decline in industrial activity to some extent last year. The main factors behind this trend include the ECB’s tighter monetary policy (with a larger impact on industry due to greater sensitivity to interest rates). German industry faced greater difficulties than other economies, as the energy crisis hit harder due to greater dependence on gas imports from Russia. Global demand cooled during 2023, whereas domestic demand stagnated as, among other things, German households put away record savings in an environment of high inflation and uncertainty (see the Focus article in Global Economic Outlook 9/2020).
Chart 5 – Synchronous nature of industrial production in the EU
Source: Eurostat
Note: The nodes represent the individual countries (see the note at the bottom of the page), the edges correlations between the month-on-month change in industrial production in the manufacturing sector in total since February 2002
Germany = global and local exporter
Germany’s main export markets are the USA, China, France and the Netherlands, as well as Poland, Italy, Austria and Switzerland. In 2023, the Czech Republic came in 12th in the ranking of Germany’s most important export territories (see Table 1 in Annex 1), followed by Hungary in 13th place. Whereas Germany imports a wide range of different products from different countries, its export range is quite uniform and similar in all destination countries. The dominant export items are motor vehicles and their parts, as well as pharmaceutical products, which are a major export product to the USA (Chart 6). However, medicines are also an important component in trade with other partners. Various categories of goods, including products with a lower degree of processing, such as steel and plastics, predominate in European trade. Measurement equipment and electrical engineering devices are more often exported from Germany to the USA and China. By contrast, the importance of the mechanical engineering sector is much smaller, as Chart 1 indicates. There is reason to believe that supplies of components from Central and Eastern Europe play a key role in German production in general, not primarily for exports.
Chart 6 – Exports from Germany by most important groups and territories – detailed breakdown
(EUR billions)
Source: Destatis
Note: Annual export volumes in 2023, GP19 classification in four-digit breakdown, for the nine largest importers, for the four most important commodity groups for each trading partner (excluding “Exceptions” and “Unspecified”)
The import intensity of German exports is relatively low. Some claim that Germany resells imported goods with added value in the form of an additional service or under its own brand, or that it assembles imported parts from countries in Eastern Europe and sells them at a significant profit abroad. However, according to the OECD, the import intensity of German exports is relatively low at 23.3% in 2020, which is significantly less than in the Czech Republic (39.6%), Poland (30%) and Hungary (48%). This also applies to specific sectors such as motor vehicles and machinery, as shown in Chart 7. Slovakia and Hungary, as the countries highest up in these statistics with values above 50%, are significantly affected by the automotive industry. However, Germany produces a wide range of products and is integrated into European production chains, from the basic production of plastics and metals to mechanical engineering. The size of the German economy and the role of imports as a key element in domestic production itself, where the pharmaceutical industry is becoming more important, should also be taken into account. The sector’s share of total exports has almost doubled since 2008, whereas mechanical engineering has stagnated.
Chart 7 – Import intensity of exports in 2020
(%)
Source: OECD (Input Output tables)
Note: Latest available value for 2020
What next?
The current model of economic growth in Germany has probably been largely exhausted. However, Germany is not the only one in this situation. Europe as a whole is facing major challenges, as shown in the long-awaited The Future of European Competitiveness analysis. The paper focuses on a strategy to increase the competitiveness of the European Union in the context of global challenges, such as technological backwardness, the energy crisis and geopolitical uncertainty. It analyses key areas where the EU lags behind the US and China and proposes specific steps to improve innovation, help decarbonisation and strengthen defence capacity. The main topics are highly relevant for Germany:
- Slowing productivity growth: The same as in the EU as a whole, Germany is facing a slowdown in productivity growth due to the underutilisation of technological innovation and weak digital transformation. Germany, traditionally strong in manufacturing sectors, is having to deal with the challenge of moving towards more technologically advanced sectors such as artificial intelligence and the digital economy, dominated by the US and China.
- Technology gap: German businesses, especially in the automotive and mechanical engineering sectors, are heavily reliant on traditional technologies and face a lack of innovation in digital technologies and green energy. This lack of innovation hampers growth and limits their global competitiveness. For example, the German automotive industry lags behind China in electric vehicles and clean technologies.
- Energy crisis and decarbonisation: Germany has been hit hard by the energy crisis caused by a shift away from Russian gas after the invasion of Ukraine. While energy prices have stabilised, German firms still face significantly higher costs than US competitors, which hampers their competitiveness. At the same time, the pressure to decarbonise and the clean energy transition requires massive investments, which are still slow and uncoordinated, hampering the German economy’s recovery.
- Dependence on external markets and supply chains: Germany is heavily reliant on global trade, especially on China as a key market and raw material supplier. Changes in the global trade order and geopolitical tensions, in particular between the USA and China, are creating uncertainties and risks for export-oriented German industry. This dependence limits Germany’s ability to respond to global changes and weakens its economic stability.
- Lack of coordination and political obstacles: Like the EU as a whole, Germany is facing excessive regulatory and administrative burdens, making it difficult to adapt quickly to new technologies and innovations. SMEs, which are at the base of the German economy, are suffering from the complexity of rules and red tape, hampering their growth and innovation.
- Ageing population: Germany, like most EU countries, is facing demographic challenges. The ageing of the labour force and skills shortages are slowing growth. Moreover, this problem is linked to insufficient investment in education and retraining of workers for new technologies.
Without major reforms and investments in new technologies, improving energy efficiency and reducing red tape, it will be difficult for Germany to achieve a significant recovery. However, steps in the right direction will need to be taken quickly, as a number of German producers are planning to shift, restructure or terminate production or part of their production chain. According to a Deloitte survey, two-thirds of the responding German companies are considering transferring part of their supply chain abroad. The survey showed that firms intend to shift one third of their German production and assembly capacities and a quarter of their other functions and services (e.g. management, marketing, R&D and maintenance). Manufacturers of cars and other machinery consider the main destinations to be the US and Asia, whereas other industrial companies prefer EU countries as relocation targets (Poland, Romania and the Czech Republic). The primary motives for companies investing outside Germany are lower energy costs (59%), lower wages (53%), a better market environment (51%) and less red tape (50%).
The German government is planning significant investments to boost its competitiveness and innovation. According to the Growth Initiative, it will improve conditions for depreciation and amortisation, increase subsidies for research and improve the availability of credit for small businesses or producers in the security and defence industry. Electromobility infrastructure will be further strengthened, construction procedures will be simplified, AI data centres and computer game producers will be supported. Furthermore, there is a plan to speed up permitting processes by aligning with the Net-Zero Industry Act, allowing for the faster approval of industrial facilities. Another important step is the development of an efficient hydrogen infrastructure and accelerating the development of renewable energy sources in order to reduce costs and ensure a safe and environmentally-friendly supply of energy. Material security is also a priority. However, from the perspective of many analysts, the changes announced are only cosmetic and concerns about fiscal sustainability will also dampen the pro-growth motivation. The competitiveness analysis determined the amount of investment needed to achieve the desired result, but a number of German politicians immediately declared themselves completely against it. Key representatives will need a fundamental shift in thinking to reopen the path to a robust recovery of the German economy.
Conclusion
Germany is a strong global economy with a diverse industrial base, strongly interconnected with its trading partners in the EU. The country was able to benefit from the recent economic recovery in the United States, deal with the end of gas supplies from Russia and, so far, competition from China. At the same time, trends such as the growing importance of the pharmaceutical industry, the reallocation of some production capacities and a greater emphasis on higher value-added production are emerging. The search for a new growth model for Germany will be a gradual process, but some features (innovativeness, diversity in production and interconnectedness with EU trading partners) offer a wide range of new opportunities.
By Soňa Benecká. The opinions expressed in this article are her own and do not necessarily reflect the official position of the Czech National Bank.
Keywords
international trade, Germany, industry
JEL Classification
E58, F31, F41
[1] In 1998, the economist Holger Schmieding described Germany as the “sick man of Europe” for the first time, when its economic growth fell below the level of other members of the emerging euro area.
[2] Exports and imports in total in USD, source: https://www.wto.org/english/res_e/booksp_e/wtsr_2023_e.pdf
[3] For comparison, Ireland is one of the most open economies in the EU, with a share of 400% of GDP, but the Czech Republic and Hungary, with shares of over 160%, are also highly open economies.
[4] In the first quarter of 2024, according to an official report from the German Federal Statistical Office, China was already in second place behind the United States, as imports from China fell by 11.7% year on year in that period and exports to China fell by 1.1%.
[5] https://rhg.com/research/tipping-point-germany-and-china-in-an-era-of-zero-sum-competition/
[6] For a deeper analysis, the GP19 classification used by the German Federal Statistical Office (Destatis) in a four-digit breakdown was used. This classification, which corresponds to the German version of the Eurostat PRODCOM production statistics, enables the allocation of imported products to production activities in Germany and enables better comparability with the statistics for domestic production.
[7] https://www.destatis.de/DE/Methoden/Klassifikationen/Gueter-Wirtschaftsklassifikationen/klassifikation-gp-19.html
[8] In terms of gross value added, industry accounts for just over 25% of GVA, agriculture and construction account for less than 5% and services for just over 70% of GDP.
[9] Between February 2022 and July 2023, production in these sectors fell by 16.7%, whereas total industrial production fell by only 2.8%.
[10] This chart takes into account the whole period, including the pandemic, but the interpretation does not change if shorter samples (before/after the pandemic) are used. Country abbreviations – Czech Republic (CZ), Poland (PL), Hungary (HU), Germany (DE), France (FR), Belgium (BE), Netherlands (NL), Italy (IT), Spain (ES), Portugal (PT), Austria (AT), Finland (FI), Cyprus (CY), Slovenia (SI), Slovakia (SK), Estonia (EE), Latvia (LV), Lithuania (LT), Greece (EL), Ireland (IE).
[11] The high intensity of intra-sector trade contributes to greater synchronisation of economic shocks and cyclical alignment, which the CNB regularly examines in its Alignment Analyses.