Germany’s autumn may not be as vibrant

The global economy is changing rapidly, though the German export-dependent economy is lost behind – only huge reforms can solve the problems.

If one knocks on the door of the International Monetary Fund (IMF) to ask for their expectation about the German economy, they will say the GDP growth this year will be 0.1 per cent – surprisingly a positive figure and not a minus 0.1 per cent. As Graph 1 shows, the first quarter of this year looked a bit brighter, but it is partly due to increased exports to the US sent ahead of higher tariffs introduced in April.

In 2024, German GDP growth rate ended at -0.2 per cent, which was an improvement from the negative growth at -0.3 per cent in 2023. Even for the traditional growth-battered Italy, GDP growth was 0.7 per cent for both 2023 and 2024.

Looking ahead, the most realistic view is that the impact of any external positive economic impulses will further decelerate for the German economy. Western economies remain under pressure. In particular, its important economic partner, France, is heading towards extreme economic troubles.

So far, the biggest initiatives from the new government were to get a new infrastructure spending bill and a defence spending agreement approved, though these are outrightly financed by debt and surely not what we favour. Additional public spending will create some positive economic growth for the next two years, likely reaching 1 to 1.50 per cent, and probably an improvement in industrial production which has suffered significantly over the past year, as seen in Graph 2.

Other pro-growth initiatives include increased tax incentives for corporate investments, but which company would want to invest more in a zero-growth environment? Furthermore, new economic relief will be provided to the hospitality sector. However, German households have already started to cut back their spending on such, so the stimulus program is losing steam before implementation.

Fruitless ‘autumn’

A “reform” that Chancellor Friedrich Merz was particularly proud of ahead of the summer break was an economic relief of EUR 60 (yes, this is not a typo) per year for those households using gas as heating. This is based on a household of four, which equates to an extra spending of EUR 1.25 (around USD 1.45) per member per month.

Despite projections of slightly higher GDP growth rates in 2026 and 2027, mostly made on the nod as mentioned, Merz and his fellow government officials are fully aware that the economy, at the very least, needs a repair. In early September, Merz unveiled an “autumn of reforms”, and this is where we get interested.

Fundamentally, it is difficult to have high expectations beforehand as the government works dysfunctionally in managing fiscal policy and other important facets of the German economy.

The past two German grand coalition governments have also turned out to be dysfunctional. This current government is led by Merz, a lawyer by profession, so the coalition agreement between political parties in the government is ironclad. The 146-page piece describes in detail how the coalition partners work together. Of course, the agreement includes, to some extent, a political goal setting for the next four years. However, a common understanding of their approach towards the economy and society is not defined, nor is there a clear setting of legislative and political priorities.

The consequence is that an “autumn of reforms” needs to be negotiated more from scratch beyond what should be expected from a majority government. A brilliant example is how the two coalition partners warm up for the negotiations. The Finance Minister and Social Democratic Party (SPD) head, Lars Klingbeil, called in one of the leading German macroeconomists in the country to advise him and his staff. This macroeconomist has a centre left-wing view on the economy. Meanwhile, the economic adviser tapped by the Ministry for Economics and Commerce (Federal Ministry for Economic Affairs and Energy) holds a centre right-wing view and aligns with its minister who is from the conservative party, the Christian Democratic Union. This means that the work with the “autumn of reforms” starts at a position where two negating partners must first meet in the middle and define their respective views on the economy – far from the workings of a unified government where they take the next batch of open issues and find solutions together as a coalition.

The embedded risk is that the would-be solutions, not reforms, are simply whatever the coalition can agree upon. Another concern arising from this setup is that the common agenda for a government coalition is they simply need to stay together. Otherwise, the political landscape within the parliament will be extremely difficult to manoeuvre.

Realignments, not reform

As for the so-called autumn reforms, the proposals we have seen mainly focus on social welfare benefits. The current allocation will probably be redistributed; it is unclear if it amounts to any budget cuts. Further, pension payments will probably get adjusted as well, though it is partially explained by the demographic change.

In light of Merz’s catchy headline on the “autumn of reforms”, this is as weak as it can be. In fact, these can only be considered as budgetary adjustments. To make the initiative interesting for investors to spend time on, long-term and impactful reforms must be introduced.

The key element is to ensure that the German economy grows at a healthy pace. The safe way is to increase the working hours for all in the labour market so production can get back on a positive track. Further, labour productivity must revert to higher levels. It can be difficult for the government to reverse the efficiency in the private sector, but a reduction of employees in the public sector may be an option for the government.

If we end where we started, at the IMF, then this fine organization has also recognized that the German economy needs an overhaul. IMF has a range of proposals where fundamental changes in the labour market also make up a significant part of the to-do list. They are not as straightforward as we are, but there is no doubt: if the “autumn of reforms” includes significant labour market reforms, then we would consider an increased investment allocation to Germany.