German Economy Is In 'Free Fall' From Self-Inflicted Policies

Germany reported its steepest drop in industrial production in 3.7 years in August, as Europe's biggest economy struggled to revive its automobile sector and sustain exports.

Industrial production declined by 4.3% month-over-month in August, reversing a 1.3% increase in July, the country's Federal Statistical Office (Destatis) said on Wednesday. The country's exports dropped 0.5% month-over-month to a nine-month low of €129.67 billion in August, Destatis said on Thursday.

Both missed the consensus. Analysts had forecast a 1% decline in industrial production and a 0.3% increase in exports, according to Trading Economics. German industrial production declined by 3.9% year-over-year in August.

"German industrial production stung by a longer re-tooling in the auto sector in August," Claus Vistesen, an economist for Pantheon Macroeconomics, wrote on Wednesday. "Shaping up to be a pretty grim first Q3 GDP print here, unless the stats office makes some creative seasonal adjustments, or makes big assumptions for the September data."

Germany's once-competitive industries have weakened due to intense rivalry from China, which is flooding markets with cheap EVs and machinery. Energy costs are three times higher than in the US, due to ill-advised net-zero policies.

Automobile industry production contracted by 18.5% month-on-month in August, according to Destatis. Machinery and equipment manufacturing and pharmaceuticals output declined by 6.2% and by 10.3%, respectively.

German Economy Is ‘Largely Dead in the Water'

These challenges have started to undercut industries that Germany once dominated. Steve Forbes wrote on October 2 that the German economy "is largely dead in the water."

"Germany seems to be in a free fall," Alex Krainer, former hedge fund manager and founder of KRAINER ANALYTICS, wrote on Thursday in a I-System TrendCompass report. "The decline of Germany has been largely self-inflicted, the result of a spectacular sequence of suicidal social, economic and geopolitical policies."

Krainer pointed to Berlin's decision to shut down its three nuclear power plants in 2023. The closures, coupled with the destruction of the Nord Stream natural gas pipelines, have increased energy costs "to the point of rendering their domestic industries uncompetitive," he said.

Volkswagen had to close three plants last year due to high operating costs, a weak electric vehicle lineup, and diminishing demand in key markets.

German Exports to US fall to Lowest Level since 2021

Meanwhile, exports to the US decreased month-on-month by 2.5% in August to €10.9 billion, according to Destatis. The drop was the fifth month-on-month decrease and the lowest value since November 2021, the statistics office said.

German companies have struggled to maintain exports to the US, their largest market, despite the European Union (EU) and the US avoiding a full-blown trade war in August. Year-on-year exports of goods to the US declined sharply, falling 20.1% in August from the same period last year.

"At the risk of sounding like a broken record, this remains the clearest illustration of the structural challenges facing German industry," ING Think wrote on Wednesday. Since the COVID-19 pandemic began, industrial production in Germany has remained some 15% below its pre-pandemic level, it said.

During the global financial crisis, also known as the Great Recession, German industrial production plummeted. For the twelve months to April 2009, production declined by 21.8%, the second steepest fall on record since 2006, according to Destatis data. Industrial production experienced a steeper drop in April 2020, during the uncertainty of the COVID-19 pandemic.

German GDP Stagnates for the Last 12 Quarters

The country's export-oriented economy has contracted or remained flat in nine out of the last 12 quarters. GDP expanded by 0.3% in the first quarter, before contracting by 0.3% in the second, according to the latest data from Destatis.

In April 2025, the International Monetary Fund (IMF) revised its projection for Germany's GDP growth in 2025 to 0% from its earlier estimate of 0.3%, due to heightened uncertainty from potential US tariffs under the Trump administration.

However, Michael A. Arouet, an economist and political analyst, attributes Germany's economic weakness to other factors.

"They urgently need structural reforms and deregulation, yet the lefts in the government just scream for more taxes and debt," he wrote on X. "With the lefts in coalition German decline will continue. Is there any hope for change?"

Weak German Economy Changing Political Landscape

Similar to the United Kingdom and France, Germany has begun to experience a shift to the right in its politics. Rising frustration about the immigration strain on the welfare state and economic stagnation has shifted public sentiment.

The right-leaning Alternative für Deutschland (AfD) has overtaken the ruling Christian Democratic Union (CDU) party as the most popular party in Germany, according to a recent poll. AfD secured 21% of the vote in the 2025 German federal election in February.

The change in political affiliation "feeds off the issue of immigration, which the political center is unwilling to confront forcefully," Brookings Institution Senior Fellow Robin Brooks wrote on Tuesday. "It's such a contentious and loaded issue. There's no choice but to confront it."

Without necessary structural changes, such as tax cuts and competitive and cheap energy, Arouet warned that the country is on its way to "become another bureaucratic, debt-loaded, high taxes, low growth country in decline. Good luck."

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