Germany's economy is facing a critical downturn as major automakers like Volkswagen, BMW, and Mercedes-Benz announce significant layoffs and factory closures. As of September 29, 2024, Volkswagen is reportedly overstaffed by 20,000 to 30,000 employees and struggling to sell half a million vehicles, leading to fears of an economic collapse.
Volkswagen's CEO, Thomas Schäfer, acknowledged the worsening situation, stating, 'The headwinds have become much stronger.' The automakers have revised their profit expectations downward, contributing to a significant drop in investor confidence, with stock losses of over 13% for Volkswagen, 19% for BMW, and 12% for Mercedes-Benz this year, amounting to nearly €34 billion in losses.
The German manufacturing sector has shown signs of severe contraction, with a four-month streak of declining activity and the fastest drop in new orders in seven months. The chief economist at Hamburg Commercial Bank, Cyrus de la Rubia, warned that the downturn is beginning to affect the services sector as well.
In response to the crisis, Germany's Economy Minister Robert Habeck held an emergency meeting with automotive manufacturers, highlighting the industry's substantial contribution to the national economy, generating three out of every ten euros. He indicated a need to incentivize electric vehicle purchases, which plummeted by 68% in August due to the removal of subsidies aimed at reducing the deficit. However, the challenge remains, as 77% of German cars are exported, and they struggle to compete with Chinese prices.
The overall outlook for the German economy is bleak, having contracted by 0.3% last year, with minimal growth of 0.2% in the first quarter of 2024 and a subsequent contraction of 0.1% in the second quarter. Analysts from the Ifo Institute for Economic Research have noted that both cyclical and structural factors are negatively impacting the economy.
The recent PMI index for September also indicated a decline from 48.4 in August to 47.2, reflecting deepening manufacturing sector woes. The production rate in German factories has fallen at its fastest pace in a year, prompting significant job cuts not seen since the pandemic. Major suppliers have also announced job reductions, intensifying concerns about potential deindustrialization in Germany.
Workers have expressed strong resistance to layoffs, with Volkswagen's employees indicating fierce opposition. The scale of job cuts parallels the winter layoffs experienced by U.S. tech companies. Meanwhile, the chemical giant BASF has announced job cuts and halted plans for a battery recycling plant in response to low demand for electric vehicles in Europe.
The International Monetary Fund (IMF) has noted that while energy costs are stabilizing, the ongoing energy transition and decarbonization requirements are weighing heavily on Germany's economy. Structural issues, including weak productivity growth and inadequate public infrastructure investment, are also contributing to the crisis.
As the situation unfolds, the German government faces increasing pressure to address these economic challenges and support the manufacturing sector, which remains a cornerstone of the national economy.