Following a contraction in Q3, the German economy is just 0.3% larger than it was pre-pandemic. Most forward-looking indicators remain depressed, meaning the recession is likely to continue over the winter.

But headwinds are as much structural as they are cyclical. Industrial weakness is likely to continue over the medium term as the effects of tougher industrial policy in key export markets weigh on demand.

The global transition towards electric vehicles (EVs) has two important negative implications for the country’s industry. First, Germany produces a far smaller share of the world’s EVs than it does internal combustion engine vehicles. Second, the imposition of protective industrial policy in several key export markets undermines German competitiveness.

Tasked with tackling these adverse structural drivers is an unpopular and increasingly fractious coalition government. Indeed, the coalition has suffered a major setback after its plan to free up €60 billion of funds beyond the limit set by the ‘debt brake’ was declared unconstitutional.

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