On an area of 357,340 sq. km and with a population of more than 83 million people Germany has about 3.5 million companies (99.6 SMEs) with a total turnover of 6.98 trillion Euro. Its economy is one of the largest in the world and leading with regards to the export of machinery, vehicles, chemicals or household equipment.
One of the biggest challenges Germany has to face at the moment is the demographic change, which exerts increasing pressure on the state’s welfare system.
The German Economy in Numbers
Germany is a very export-oriented and also export-dependent country. At the same time the country relies on imports due to its lack of raw material. In 2020 Germany spent 1,207 billion Euro in exports worldwide and 1,027 billion Euro in imports from countries all over the world.
Main commodities traded 2020 (after German Federal Statistical Office)
Exports of goods
Machinery and mechanical appliances 17,2%
Vehicles (excl. rail) and parts 15,2%
Electrical goods, appliances 11%
Pharmaceutical products 7,2%
Optical, photographic or medical instruments 5,4%
Imports of goods
Machinery and mechanical appliances 12,8%
Electrical goods, appliances 12,7%
Vehicles (excl. rail) and parts 10,5%
Mineral fuels, mineral oils and products 6,7%
Pharmaceutical products 5,7%
In 2020 the German gross domestic product (GDP) amounted 3,803 billion $. The GDP per capita was 45,733 $. Germany had an inflation rate of 0,5 percent. The unemployment rate in 2021 was 3.3 percent. The German GDP is composed mostly of services (around 70 percent), industry (around 29 percent) and agriculture (around 1 percent).
Industrialization and Economy until World War II
Industrialization came to Germany a little later than to Great Britain (about 1815), but developed and spread very quickly due to the Customs Union (Deutscher Zollverein) and the at that time state-of-the-art railway system. The development of the railway system and free trade led to an outstanding economic development in Germany. Another benefit was the unified monetary system, the “Deutsche Mark”.
A milestone in the German history is the introduction of social insurance by chancellor Otto von Bismarck in 1883. The program included health care and insurance, compulsory education, accident and disability insurance as well as a retirement pension. Germany’s economy grew rapidly and in the beginning of the 20th century the country produced more steel than either Great Britain or the United states. 60 percent of the German GDP in 1913 came from the industry and during this time Germany was worldwide leading in the production of chemicals and electrical equipment.
After a strong involvement in the First World War and significant damages afterwards, Germany’s economic prosperity could not last. The country had to face an uncontrollable inflation, a rapidly increasing unemployment rate as well as high debts due to the obligation of paying reparations. The rising social discontent and poverty among the people created a perfect breeding ground for the racial ideas of National Socialism and allowed the growth of the power of the Nazis.
Economy since 1945
After the Second World War Germany was split into East and West. The western part, highly influenced by the allies United States, Great Britain and France developed a democratically driven capitalist economy, which was similar to the one existing today. Especially the Marshal Plan was adopted in West Germany in order to modernize business procedures and increase productivity. This led to the West German boom, also called “Wirtschaftswunder” in the 1950ies. During this time industrial production grew about 25 percent, the GDP rose by two thirds in the same decade and the unemployment rate decreased from 10.3 percent to 1.2 percent.
The German economy after the Second World War is labeled “social market economy”. The country wants to stress the freedom of state intervention and domination as well as the social or human dimension. The term “social” shows that the economy should not only help the wealthy, it should also care for its workers and the ones in need.
The eastern part of Germany became part of the Eastern Bloc of Soviet States and its economy evolved differently due to the socialist influence of the Soviet Union. While West Germany’s exports amounted 323 US-Dollar billion, East Germany had only about 30.7 billion US-Dollar of exports in 1988. With the fall of the Berlin Wall in 1989 the division of East and West Germany was overcome and the country was unified again.
After the union the German state invested high sums of money for the rehabilitation of the former East Germany in order to support its transition from a socialist planned to a market economy. In the 2000s the German economy began to stagnate and due to high unemployment rates the German welfare system was under pressure. The German economy also suffered from the global financial crisis in 2009. Thanks to economic reforms and a recovery plan Germany could overcome the crisis quickly and the countries growth continued. In 2014 Germany even was able to obtain the highest trade surplus worldwide.
Germany and the European Economy
The highly diversified and industrialized German economy is the largest economy in Europe. Furthermore it is widely considered to be the stabilizing force within the European Union. Compared to the EU’s other member states the growth rate of the German economy was double within the last seven years.
Germany remains a global player, especially with goods from the automotive or chemical sector. 10 percent of all manufacturing companies in Europe are located in Germany, which generate 28 percent of the sector’s EU turnover. The excellent business framework and superior productivity rates make Germany a very popular location for production.
Germany has some natural resources including timber, iron ore, potash, salt, uranium, nickel, copper and natural gas. Although most of the energy in Germany comes from fossil fuels, Germany is leading when it comes to the development and use of renewable energies. About 27 percent of its electricity are recovered from renewable sources, for example biomass, wind, hydro, solar or nuclear power.
Germany ranks among the world’s leading countries for foreign direct investments (FDI). In 2016 Germany amounted 731 billion Euro in inward FDI stocks with 59 percent originating within the EU. There is a steady growth in the investments of countries outside the EU, for example Asia holds a 12 percent share of the FDI stock. Different international surveys ranked Germany as one of the top and most attractive business locations worldwide. With Berlin, Frankfurt and Munich Germany has three of the top five most attractive cities for business within the European Union. Especially the infrastructure, workforce qualification, the political and legal stability as well as the attractive domestic market are some of the factors that are appreciated mostly about Germany.
The German economy is very open to foreign direct investment in all industry sectors and there are no regulations in the everyday business. Legally there is no distinction made between German and foreign nationals when it comes to investment or the establishment of a business, as the principle of freedom of foreign trade and payment is respected.
About 70,000 foreign companies are already doing business in Germany with about 3 million people employed. In 2016 more than 1,100 investment projects were recorded, the best result Germany achieved to date. With regards to the different sectors ICT & Software held a share of 20 percent of the FDI projects between 2010 and 2016. Moreover the sectors business & financial services (15 percent), industrial machinery & equipment (11 percent) and textiles (10 percent) are attractive for foreign direct investments. The drivers of growth can be found in the transportation & automotive industries, information & communication technology, environmental technologies and energy as well as pharmaceutical and biotechnology, according to the Ernst & Young Attractiveness Survey 2017.
Incentives for Business in Germany
Companies benefit from the advantageous geographic location in the heart of Europe. With a highly-developed transportation network national and international access to the domestic and international market is possible without problems. According to the World Bank Logistics Performance Index 2016 Germany ranks on the top before Luxemburg and Sweden with regards to the quality of infrastructure.
Another important fact which contributes to the high attractiveness of Germany as a business location is its high productivity. In contrast to many other European countries Germany’s labor costs remained stable and did not increase in the last years. Due to this development Germany’s economy was able to become more competitive. Moreover the production standards in Germany are state-of-the-art and valued worldwide.
Another important factor when it comes to Germany’s high productivity is its excellence in professional education. More than 80 percent of Germany’s workforce obtain an academic degree or passed a formal vocational training. Germany’s dual education system, which combines employment training (“on the job”) and vocational school training (“off the job”), is outstanding within Europe and the world. More than 52 percent of Germany’s workforce have passed an apprenticeship in the dual education system. This leads on the one hand to highly qualified personnel and on the other hand to the lowest youth-unemployment rate throughout Europe.
Germany is leading when it comes to innovation in Europe. Expenditures for research and development have been growing steadily since 2009 and in 2015 they amounted almost 89 billion Euro. The increase of national and international research facilities in Germany support the dynamic development of the German economy.
Industries play a big role. The fruitful cooperation between enterprises, universities and research organizations are the key to Germany’s successful innovations. Throughout Germany there are various regional R&D clusters from which companies as well as research institutions can benefit. Furthermore Germany is also leading with regards to patents. In 2016 Germany applied for nearly 19,000 patents at the European Patent Office.