The Week That Was in Europe
Is Germany’s Industrial Slowdown About to Spiral?
Feb 15, 2025
Germany's industrial sector faces a troubling decline, with manufacturing activity decreasing since 2018. The conversation reveals potential 'cluster effects' that may worsen the situation, as well as the consequences of supply chain disruptions and rising geopolitical tensions. The shift to electric vehicles and competition from China present significant challenges. Insights from economic theory, particularly regarding production networks, shed light on these cascading risks and the urgent need for a strategic response to maintain Germany's industrial strength.
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Quick takeaways
- Germany's manufacturing sector is experiencing a significant decline, driven by competition from countries like China and rising energy costs.
- The shrinking of industrial clusters in Germany may create a self-reinforcing downward spiral, threatening productivity and new firm entries.
Deep dives
Decline of German Manufacturing
German manufacturing has experienced a substantial decline over recent years, with production levels on a downward trend since early 2018. By the end of 2024, manufacturing production was recorded at 3.3% lower than the previous year and significantly lower than pre-pandemic levels, with car production alone dropping around 26%. This downward trend is not isolated, as it encompasses various subsectors, including machinery and chemical production. Although measuring production does not account for inputs and can give a distorted view, the overall picture of declining value added in the sector paints a bleak reality for German manufacturing.
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