Germany is the fourth-largest economy in the World by nominal GDP and the largest economy in Europe. The country is the world’s third-largest exporter and importer of goods. Being a part of the European single market, Germany has access to more than 450 million consumers.
The German economy: overview
Germany has a social market economy. In 2002, Germany introduced the common European currency, Euro. The European Central bank, headquartered in Frankfurt, sets monetary policies for the whole Eurozone.
Germany is also the home of 29 of the Fortune Global 500 companies.
Germany has a stock exchange in Frankfurt which operates DAX, a German stock market index. The index lists well-known companies like Volkswagen, BMW, Audi, Siemens, Porche, Adidas, Allianz, Bosch, and Deutsche Telekom.
Germany also has a highly skilled labour force, a low level of corruption, and a good infrastructure. Research and development are highly regarded in Germany. Germany was ranked ninth in the Global Innovation index in 2020. That is why cities like Berlin and Munich are known as startup hubs.
German economy by sector
Germany has a service-based economy. In 2020, as figure 1 shows, the service sector in Germany contributed 70.4%, followed by the production industry which contributed 22.9% of the GDP. The remaining GDP was generated by construction (6%), and Agriculture, forestry and fishery (0.7%).
Figure 1. Sector-wise GDP contribution in Germany. Created with data from Statista, StudySmarter Original
Services
Germany is a financial hub. The financial, renting, and business activities contribute to 30% of their GDP. the country is also a famous tourist destination. It is the seventh most visited country in the world. The tourism sector contributes to 18% of the GDP. The service sector employs more than 70% of the workforce.
Industry
Germany tops the production of quality automobiles, machinery, electric equipment, and chemicals. In Germany, 99% of firms are categorised as small and medium-sized enterprises (SME). These companies are called ‘Mittelstand companies’ in Germany and they are global leaders in their niche. They do not diversify much from their focus but grow internationally to capture more market.
Primary sector
The primary sector in Germany is contracting. In 1991, the primary sector accounted for 4% of the country’s GDP and is now down to 0.7% in 2020. Despite this, agriculture is extremely productive in Germany. The mining industry in Germany is limited to Lignite, potash salt, boron, and selenium.
German economic system
Germany is a mixed economy.
A mixed economic system is a system that combines aspects of both capitalism and socialism.
More specifically, it is a social market economy.
Note: The term ‘social market’ is not be confused with the term 'socialist economy'.
In Germany, an individual is free to own property, has freedom of movement, free choice of occupation, freedom of association, and equality. Germany has a free market but under the laws of the German Constitution.
The German government provides health protection, unemployment and disability support, and pensions via individual and business contributions. The government tries to keep a fair market concerning monopolies or wrongful business practices.
The German government runs the social market economy via various government agencies. The active role of the government in the economy helps reduce many problems of a free market economy.
Mittelstand
As described earlier, 99% of companies in Germany are SMEs. In Germany, Austria, and Switzerland, Mittelstand is different from SMEs. In these countries, Mittelstand is considered a company with unique characteristics and not just quantitative classification.
Some characteristics of Mittelstand firms are that they're family-owned, have generational continuity, are independent and flexible, they focus on a niche, are innovative, socially responsible, local but with a global approach, and they invest in the workforce.
0.34% of the German companies which have revenues between €50 million to €1 billion also distinguish themselves as upper-sized Mittelstand firms such as Robert Bosch. The main areas that have Mittelstand companies are machinery, electrical equipment, auto parts, and chemicals.
The German economy’s worth
As we mentioned at the beginning, Germany is the fourth-largest economy in the world after the US, China, and Japan. The nominal GDP of Germany in 2020 was $3.85 trillion. Germany is also one of the richest countries in the world.
The GDP per capita in current US dollars is $46,208.4. Like all the major economies, the German economy is also showing a post-pandemic slow recovery due to the disruption of supply chains.
Inflation in Germany was expected to be around 5.3%. One of the reasons for this high inflation is that prices and VAT were dropped temporarily in the second half of 2020.
International trade in Germany
Germany is one of the most international economies in the world and the third-largest trading nation after China and the US. Exports contribute to 50% of the annual GDP in Germany. In 2016, Germany recorded the highest trade surplus in the world: it was worth $310 billion.
As Germany is export-oriented, in the years 2020 and 2021, German trade was mainly affected by the COVID pandemic and Brexit. The exports from Germany to the UK declined since 2019. The demand for German goods fell sharply as supply chains were disrupted due to the pandemic.
During this period, imports and export fell by 7.1% and 9.3% respectively as compared to the year 2019. The export was €1.2 trillion and import was €1 trillion1.
Figure 2. Major exports of Germany. Created with data from the Federal Ministry of Economic Affairs and Energy, 2019 report, StudySmarter Original
From figure 2, it is evident that car and car parts, machines, chemical products, and data processing devices contribute to more than 50% of Germany’s exports. Other major exports include electrical appliances, pharmaceutical products, vehicles, and metals. The top three german good importing countries are the USA, China, and France.
Circular economy in Germany
Today, in many countries, industries follow a linear economy.
Linear economy uses resources once and then discards them.
This is not sustainable as it is a wastage of valuable resources. Investors, consumers, and lawmakers around the world are backing up a sustainable approach toward the production of goods and services. They believe it can be achieved through a circular economy.
In a circular economy, manufacturers design products with minimum raw materials, to be reused and recycled, and use renewable energy sources.
A circular economy tries to keep a balance between industrial development and the environment.
In 2015, the European Commission approved an action plan that included 54 measures to ‘close the loop’ of the product life cycle to boost the circular economy in Europe. In 2020, they approved a Circular economy plan that has new measures for businesses, public authorities, and consumers.
In recent years, Germany has invested in renewable energy sources and digitization. A strong environmental technology exporter, efficient production chains, and a high number of patents have provided Germany with a strong base for the circular economy.
Germany has adopted a sustainable development strategy, the Resource efficiency program, and is developing national programs for sustainable consumption. Germany is a leader in waste management but lacks in other aspects of the circular economy like production and consumption, secondary raw materials, competitiveness, and innovation.
The Federal Ministry of Education and Research founded the Circular Economy Initiative Deutschland (CEID) in 2019 to promote the country’s economic transformation to a circular economy through a multistakeholder approach. The objectives of this program are to attain:
- Circular business models and regulatory framework conditions.
- New value networks and traction batteries.
- New value networks for packaging.2
Germany needs a comprehensive, integrated circular economy strategy with concrete targets for aspects such as waste prevention, recycling, and total resource consumption. And it needs it sooner rather than later.
– Thomas Weber, Acatech, Vice-President and chair of CEID.
The future of the German economy
It is predicted that the German economy will grow by 3.6% in 2022 and by 2.6% in 2023 according to the European Commission. The growth will slow down due to supply chain bottlenecks and an expected fourth wave of the Covid-19 pandemic. (KPMG research, 2022).
The current unemployment rate is 5.1% which is expected to decline in 2022 as there is a shortage of skilled workers. After the pandemic, there is a huge demand for the services. The higher the demand, the higher the prices. Inflation will be 3.7% in 2022 and will come down to 2.1% in 2023.
The German economy is facing some challenges that should be tackled for a better future. Some of Germany’s economic challenges are digitization, disturbed supply chains, low birthrate, ageing population, and pressure on social structures due to migration.
Germany Economy - Key takeaways
- Germany is the fourth-largest economy in the world by nominal GDP and the largest economy in Europe.
- Germany is the world’s third-largest exporter and importer of goods.
- Germany has access to more than 450 million consumers.
- In 2020, the service sector in Germany contributed 70.4%, followed by the production industry which contributed to 22.9% of the GDP.
- Germany is a social market economy.
- 99.34% of companies in Germany are Mittelstand.
- Germany tops the production of quality automobiles, machinery, electric equipment, and chemicals.
- The nominal GDP of Germany in 2020 was $3.85 trillion.
- The exports contribute to 50% of the annual GDP in Germany.
- Germany has a good waste management system but it lags in other aspects of the circular economy.
- It is predicted that the German economy will grow by 3.6% in 2022 and by 2.6% in 2023.
References
1. Federal Ministry of Economic Affairs and Energy, Facts about German foreign trade, 2019.
2. Circular economy Initiative- Deutschland. https://www.circular-economy-initiative.de/english#:~:text=Objectives,in%20Germany%20could%20be%20fostered.
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