Crisis in the German economy: The role of China

Article by Carsten Klude

The German economy is also weakening because we are still an industrialized country in which the share of the manufacturing sector in the total value added, at 20 percent, is significantly higher than in many other developed economies. Germany's most important trading partner, measured by the sum of exports and imports, has been China since 2016, which has overtaken the USA and before that France in this ranking. If, on the other hand, one only looks at exports, there have been downright tectonic shifts in the last three years. While in 2020 China was still roughly the same as the USA as the most important destination country for German exports, China has now been clearly overtaken by the USA and has also been overtaken in terms of importance by France and the Netherlands.

Similar to Germany, the Chinese economy not only has a cyclical problem, but above all a structural one. In view of the high level of debt, further extensive government fiscal programs to support the domestic economy can hardly be financed. One is reminded of the situation in Japan in the 1990s, when the bursting of the housing bubble led to years of deflation and economic stagnation. And China has another parallel to countries like Japan and Germany: a shrinking population. Since the potential growth of an economy, i.e. the long-term economic growth that can be achieved with normal utilization of production capacities, is determined by the development of the labor supply or the labor force potential and labor productivity, it can be assumed that China’s growth rates will decline significantly in the coming years.

Equally important: Even if the next US presidential elections are still more than a year away, all economic nations for which international trade and in particular economic relations with the USA play an important role should already consider the possible effects of Donald Trump's re-election. Should Trump become US President again, a new global trade war is imminent. This is likely to have a negative impact on China and Germany.