Europe's largest economy may once again fall into the quagmire of recession this year.

On Wednesday, local time, the German government downgraded its economic forecast for 2024, stating that Germany will contract for the second consecutive year before beginning to recover in 2025.

The German Ministry of Economics said in a statement that it expects this year's GDP to shrink by 0.2%, far below the previously predicted growth rate of 0.3%.

Last year, the German economy fell by 0.3%, making it the only major developed country in the G7 with negative growth, which also dragged down the overall performance of the European economic zone. However, until now, the "European economic locomotive" has not yet restarted its engine and regained its growth momentum. German Vice Chancellor and Minister of Economics and Climate Protection, Robert Habeck, said that Germany's structural problems make growth difficult, and this will continue until next year.

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Despite the tide of slowing global economic growth, many countries in the eurozone are on the track of a faltering recovery. Why has Germany been unable to emerge from the shadow of low growth for so long?

The risk of recession is coming again.

After a technical recession in 2023, there were signs of economic recovery in Germany at the beginning of this year. The GDP increased by 0.2% quarter-on-quarter in the first quarter, and the Ifo business climate index also reached its highest level since May 2023 in April.

However, such a recovery momentum was not sustained. In the second quarter of this year, Germany's seasonally adjusted GDP growth rate turned negative, falling by 0.1% quarter-on-quarter. A number of indicators such as PMI, business climate, and industrial order volume also reflect the increasing pressure on the growth of the "European economic locomotive".As a leading indicator, in September, Germany's composite PMI initial value continued to decline for the fourth consecutive month, further probing below the boom-and-bust line, with the manufacturing PMI initial value at 40.3, marking a new low in nearly a year. Recently, the Ifo Business Climate Index for September, announced by the Munich-based Ifo Institute for Economic Research, has been sliding for four consecutive months. The seasonally adjusted industrial new orders in August decreased by 5.8% month-on-month, indicating that manufacturing demand remains weak.

German companies are also shrouded in a bleak outlook. According to data from the Federal Statistical Office of Germany, in the first six months of this year, the number of companies filing for bankruptcy in Germany increased by nearly 25% compared to 2023, and in August alone, the number of regular bankruptcy proceedings filed in Germany increased by 10.7% compared to the previous year. Even the automotive industry, a pillar of German strength, is not immune; Volkswagen recently announced the closure of domestic factories, and both BMW and Mercedes-Benz have lowered their profit expectations. A survey released by the Federation of German Industries on August 1st shows that an increasing number of German companies are considering reducing production or relocating overseas.

"The German economy has never experienced such a prolonged period of weakness," said Martin Wansleben, CEO of the Federation of German Industries, noting that Germany only experienced consecutive economic recessions in 2002 and 2003.

The German government stated on Monday that the industrial sector has dragged down output, failing to recover from the shocks brought about by the COVID-19 pandemic and the Russia-Ukraine conflict.

However, Germany has been slow to emerge from the quagmire of low growth. Where does the difficulty of recovery lie?

Germany has a typical export-oriented economy, and weak external demand has significantly dragged on the economy. Firstly, the slowdown in global economic growth has led to insufficient external demand, weakening Germany's growth momentum. Secondly, the prolonged geopolitical situation has also impacted Germany's foreign trade and energy supply. Internally, pillar industries such as automotive face fierce competition from China and the United States, leading to a decline in their relative advantages in the international market. Yet, new growth points such as emerging industries have not been formed, which in turn affects investment and consumer confidence.

Zhu Yufang, a researcher at the German Research Center of Tongji University, told the 21st Century Economic Report that Germany's current main problem is the downturn in manufacturing. Among all developed economies, Germany has the highest proportion of manufacturing, and in recent years, Germany's manufacturing industry has faced a series of significant challenges.

Firstly, there is the issue of energy supply. After the outbreak of the Russia-Ukraine conflict, the source of Germany's most important industrial energy—imported natural gas—was cut off, severely impacting energy-intensive industries such as chemicals and metal processing in Germany. Although natural gas prices have now fallen, there is still a lack of a long-term stable low-cost energy source, putting Germany's high-energy-consuming industries at risk of outflow. In addition, consumer prices, which were driven up by high energy prices at the time, remain high, affecting the export competitiveness of German industrial products.

Secondly, in recent years, the European Central Bank has continued to raise interest rates to combat inflation. However, Germany's inflation is mainly caused by input inflation due to energy prices. Raising interest rates further increases the cost of capital,加重企业负担, exacerbating the economic difficulties in Germany.Is the German Development Model No Longer Effective?

Geographical conflicts and a slowdown in global demand are cyclical headwinds that hinder the German economy, but the structural transformation taking place within Germany is also slowing down the recovery.

Geraldine Dany-Knedlik, head of forecasting and economic policy at the German Institute for Economic Research (DIW), recently summarized that while Germany appears to be troubled by economic contraction, it is actually being held back by structural changes. The green transition, digitalization, demographic shifts, and fierce competition from external companies have triggered a process of structural adjustment, weakening the long-term growth prospects of the German economy.

In recent months, there have been no shortage of voices claiming that "the German development model has collapsed." In the past, the German economy was able to achieve long-term vigorous development, largely relying on stability-oriented policies, a large number of "hidden champions" companies, the ability to produce high-quality industrial goods, and export-oriented growth, which was based on cheap energy and globalization.

But now the situation is changing. A report released by ING Bank in July pointed out that the German industry and economy are caught in both cyclical and structural headwinds, but Germans will eventually realize that the old macro business model, which relied on cheap energy and easy access to large export markets, is no longer effective. The Economist Intelligence Unit also believes that Germany's sluggish growth can be attributed to the limitations of the current economic model, namely dependence on trade with the United States and China, high energy prices, a lack of public investment due to strict restrictions on government debt, and a poor demographic outlook.

This Monday, German Finance Minister Christian Lindner responded by saying that the German development model has not collapsed, but has gradually lost competitiveness over the past decade.

In Ding Chun's view, the German development model can be simply summarized as utilizing Russia's cheap energy supply and a vast overseas market, including China. However, this model has faced significant practical challenges after the Russia-Ukraine conflict. On one hand, it can be seen that Germany has been working hard to transform and has achieved certain results, such as quickly switching its energy supply structure from pipeline natural gas to LNG, thereby reducing external dependence to some extent.

But at the same time, under the turn of the times, the transformation of the German model still faces considerable pressure. Ding Chun explained that, first, the energy transition is not yet complete, and Germany still faces the problem of unstable energy supply. Although electricity prices have fallen significantly from their peak, there is still a risk of fluctuation. Secondly, there is a lack of innovation. The gap between Germany and China and the United States in the fields of digitalization and other industries is becoming increasingly obvious, and the international competition felt is naturally becoming more intense. However, the creation of emerging industries and an innovative atmosphere is not a task that can be accomplished overnight. It requires the joint promotion of various factors such as funding, social environment, and talent training systems. Taking the innovation and financial system as an example, there is still a significant gap between Germany's capital market size, the activity of venture capital, and the financial system's support for science and innovation compared to the United States.

Furthermore, Germany's close connection with external markets is also a huge risk exposure to external geopolitical conflicts. The turbulent situations in Russia-Ukraine and the Middle East not only impact global economic growth and affect Germany's trade performance but also divert government spending and policy focus, making it difficult to focus on economic development.