The German economy has been stuck in a crisis for the past two years amid stagnant growth and growing structural challenges.  

High energy prices, bureaucratic red tape, lagging investment in physical and digital infrastructure, as well as weakening demand in key foreign markets have hit German firms hard. 

The economic slowdown in China, in particular, has had a major impact.  

The Asian giant has long been a key market for German industrial companies, especially in the automotive, machinery and chemical sectors. And Chinese orders helped create well-paid jobs in Germany.

But multiple economic challenges, including a property market crisis, trade tensions and demographic problems, have shaken consumer confidence in the world's second-biggest economy and slowed growth. This has also led to lower demand for German goods.  

"German exports to China expanded by double digits in the 1990s and 2000s, but growth began slowing a decade ago," according to a report published by the Rhodium Group in February 2024.

"After peaking in 2022, exports fell by 9% in 2023 despite continued economic growth in China — by far the steepest decline since China joined the WTO," it said.  

Struggling to deal with the challenging business environment, many German companies — including big names like Volkswagen, BASF, Continental and ZF, among others — have announced restructuring and cost-cutting measures, including thousands of job cuts in Germany.  

'Very subdued atmosphere' in China

At the Berlin Global Dialogue last week, the head of Mercedes-Benz, Ola Källenius, said there's a "very subdued atmosphere" in China in terms of consumer sentiment and that many entrepreneurs are "waiting and watching."

"The sentiment right now, on most entrepreneurs and consumers that are buying goods on the higher end, higher expensive capital goods or even luxury goods, is very cautious," he noted, adding, "That market has been shrinking at a worrying rate."

Källenius pointed out that the health of the property sector is crucial for China's economy.

"For many people in the US, you have your 401(k) for your retirement. In China, you have an apartment. If the equity value of that apartment over the last 24 months has gone down by 30%, you don't feel flush. You don't go out and buy an [Mercedes-Benz] S-class," he said.

To reverse the economic slowdown, China recently unleashed a surprise bundle of new monetary stimulus measures, including interest rate cuts. The nation's leaders also signaled fiscal support to revive flagging growth and stabilize the troubled real estate market.

As part of the fiscal boost, China's Finance Ministry is planning to issue 2 trillion yuan (€259 billion, $284 billion) of special sovereign bonds this year, Reuters reported.

The stimulus package is viewed as an important first step in reviving Chinese growth and it lifted investor sentiment, triggering a massive rally in Chinese equities last week.

Max J. Zenglein, chief economist at Mercator Institute for China Studies, told DW that the series of measures introduced to support the economy are primarily aimed at stabilization.  

"The stalled real estate sector, and consequently weak consumption, have persisted stubbornly throughout 2024," he said, adding, "With no improvement expected in the third quarter, the focus has shifted to establishing a floor for the real estate market."

Will China's new stimulus measures be enough?

However, it's too early to say whether the announced measures will produce an economic rebound by increasing consumer confidence and boosting demand, which could have a positive spillover effect on the global economy, including Germany's. 

At the Berlin Global Dialogue, Mercedes-Benz CEO Källenius said the situation in China is key to the company over the next few years.

"Can China break that confidence crisis? That is the most important thing for us from a business point of view, in the short to midterm."

Tianlei Huang, research fellow and the China Program coordinator at the Peterson Institute for International Economics, wrote in a report that the Chinese stimulus package's "economic effects may turn out to be limited."

"The steps announced so far do not address the deep-rooted problems in China's economy that weigh on its growth, including Beijing's increasing prioritization of national security over economic development, its discrimination against the private sector, and its inadequate fiscal policies," he outlined.

Even if China manages to reverse its slowdown, many observers warn it may not automatically translate into higher German exports into the country.

Over the past two decades, there has been high demand in China for German goods and tech knowhow.

However, "there are signs that German exports to China are entering a period of structural decline due to shifting competitive dynamics in the car industry, China's import substitution policies, and a localization wave by German firms in China," Noah Barkin and Gregor Sebastian, experts at the Rhodium Group, wrote in their report.

"This could lead to a gradual erosion of the link between Germany-based production and China-based sales."

Changing strategy and market environment in China

Moreover, many German companies are investing heavily in China and adopting an "in China, for China" approach to production, in an attempt to make their operations in the Asian country independent of their business elsewhere.

In the first six months of this year, German direct investments in China amounted to €7.28 billion ($8.03 billion), almost 13% higher than the total figure for 2023, which stood at €6.5 billion, according to data from Germany's central bank.

The trend highlights the importance of the Chinese market for German firms despite growing calls from policymakers for businesses to diversify and shrink their Chinese investments.

While the announced monetary measures and promised fiscal support raise hopes of a Chinese economic rebound, MERICS expert Zenglein said the "stimulus will not focus on the areas that are particularly relevant for Germany."

"Anyone who now believes that economic growth in China is rising sharply again and that this will improve their situation on the Chinese market is wrong — and has been for three years," he stressed.  

"Companies that have not been successful in recent years will not be successful now, mainly due to the changing market environment with stronger Chinese competition."  

Edited by: Ashutosh Pandey