IN THE second quarter of this year the German economy shrank by 0.2%. Economists expect it to contract again in the third quarter, meaning that the economy will technically be in recession. Some believe that the economy will not grow until the middle of next year. This performance has taken some people by surprise—the German economy was supposed to be Europe’s powerhouse. What went wrong?
The German economy is powered by exports. Its current-account balance (the difference between the money it receives from the outside world and what it spends abroad) is one of the world’s largest, at 7% of GDP. It is an open economy: its ratio of exports to GDP is double China's. So when Germany’s exports fall by 6%, as they did in August, you know it is bad news. In recent months the global economy has turned against Germany. About 6% of German exports go to China, especially what economists call "capital" goods such as heavy machinery. China's economy is slowing: in 2010 GDP growth was 10% but this year it will be more like 7%. What is more, China is rebalancing away from investment—which requires capital goods—towards consumption, which does not. Germany has also been hit by slow growth in the 17 other euro-zone countries, where it sends 40% of its exports. To add to this mess, Russia, which takes 3% of Germany's exports, is facing a full-blown economic crisis as low oil prices and Western sanctions hit home.
Some Germans protest that nothing is really wrong. The world economy is going through a rough patch, they say, and Germany is structurally sound. Unemployment is at less than 5% so few Germans are feeling the pain. But there are other problems. Following the nuclear disaster in 2011 in Fukushima, the German government decided to swing away from nuclear power towards renewables (known in Germany as the Energiewende). That, according to Steen Jakobsen of Saxo Bank, has further boosted energy prices for industry, which were already among the highest in Europe. That has prompted some firms to relocate. In 2013 BMW, a car company, moved a factory from Germany to America, where energy prices were 80% lower. Hungarian industrial production is booming, says Mr Jakobsen, as firms take advantage of cheaper energy. In August German industrial production fell by 4%.
Germans should worry about their economy, but so should the rest of the world. In 2013 Germany hauled the euro zone out of recession; the zone could badly do with another boost. The German government needs to ramp up investment. On a conservative estimate, Mrs Merkel's government could increase infrastructure spending by some 0.7% of GDP in 2015 without breaking its own fiscal rules. That money should be used to accelerate "shovel-ready" federal projects, such as repairing bridges and completing roads. It is much needed: Germany’s rate of public investment—a paltry 1.6% of GDP—is one of lowest in Europe and has fallen since 2009. Unless Germany steps up, the problems could get much worse.
