QNB: Once the Growth Engine, Germany Is Now an Economic Laggard in the EU

Doha, September 26 (QNA) - Qatar National Bank (QNB) said that Germany's weak economic performance is largely linked to mounting pressures on its export-led industrial model, which had been a key pillar of its economic strength for decades.

Rising energy costs, intensifying competition from China and domestic structural constraints are increasingly weighing on the model.

In its weekly commentary, QNB noted that Germany's ability, as Europe's largest economy, to reinvent its economic model, as other Euro area countries such as Spain have begun to do, will shape the continent's prospects in the years ahead.

The bank explained that this will require Germany to modernize its infrastructure, undertake structural reforms to ease administrative burdens and adapt its industrial base to changes in the global economy.

QNB said Germany, once a major growth engine for the Euro area, has now become one of the region's lagging economies. Real output contracted in 2023, stagnated in 2024 and grew only marginally by 0.2% in 2025.

While Euro area economies continued to expand at a stronger pace, Germany returned to modest positive growth this year.

The bank noted that much of Germany's persistent economic weakness stems from the poor performance of its industrial sector, particularly manufacturing and the export-oriented Mittelstand — the dense network of small and medium-sized, often family-owned firms that forms the backbone of German employment and exports.

QNB explained that the Mittelstand refers to Germany's extensive network of small and medium-sized enterprises, many of them family-owned, which play a central role in employment and exports and are widely regarded as a backbone of the German economy.

The report said understanding the difficulties facing Germany is important for the whole of Europe, given the country's economic weight and its deep supply-chain links with its neighbors.

It noted that the weakness of the German economy is particularly evident in manufacturing, where value-added peaked in 2017, while overall industrial production is now around 15% below its previous high. This represents a decline spanning most of the past decade rather than a single difficult year.

QNB added that IMF estimates indicate that manufacturing and construction accounted for the bulk of Germany's growth gap relative to the Euro area, with much of the shortfall reflecting sustained underperformance and weak growth rather than temporary cyclical factors.

The bank pointed out that industry accounts for around one-fifth of German output, a far larger share than in France or the United States, making its weakness consequential for the economy as a whole, from investment to employment.

QNB identified three key dimensions of Germany's economic underperformance: the industrial recession at its core, the competitiveness squeeze facing the Mittelstand, and the short-term headwinds from energy costs.

The first dimension, QNB explained, is the weak performance of Germany's industrial sector, which faces deep structural problems that constrain economic growth. Years of underinvestment have left ageing infrastructure and a persistent lag in digitalization, while a shrinking working-age population, chronic skilled-labor shortages and heavy bureaucracy weigh on potential growth. High relative unit labor costs have also prompted some firms to shift new investment abroad.

Against this backdrop, the government has enacted a major fiscal expansion, including substantial funding for infrastructure projects and higher defense spending through a reform of the constitutional debt limit. This is expected to support demand from 2026 onward. However, the impact of the package will depend on the efficiency of its implementation and on whether it is accompanied by the structural reforms needed to restore competitiveness.

The second dimension is the growing competitiveness squeeze facing the Mittelstand. Over the past two decades, China has shifted from a vital export market into a formidable competitor, displacing German machinery and vehicles both in third markets and within China itself.

The report noted that, given the greater exposure of German goods exports to China compared with those of France or Italy, these pressures are weighing particularly heavily on Germany's export-oriented industrial sector.

QNB pointed out that German exports to China fell by more than 12% year-on-year in the first half of 2026, reducing China to only the ninth-largest market for German goods — a position that would have been unimaginable just five years ago, when China ranked second. At the same time, more than three-quarters of German mechanical engineering companies regard China as their greatest strategic threat.

The third dimension is the short- and medium-term impact of energy prices and their implications for the competitiveness of German industry.

QNB explained that industrial electricity prices in Germany are roughly double those in the United States, reflecting the lasting impact of the loss of cheap pipeline gas. This represents a particular burden for energy-intensive industries that underpin many industrial supply chains.

The report highlighted that, although wholesale gas and electricity prices in Germany have retreated from their crisis peaks, they remain well above pre-2022 levels and the prices paid by many international competitors.

QNB concluded that German industrial companies continue to face a difficult adjustment period as they invest in energy efficiency and adapt to a more expensive energy environment. It added that the escalation in the Middle East has further aggravated this weakness. (QNA)