As Europe’s largest economy, Germany has gone through a challenging period in recent years. The impact of rising energy costs, structural obstacles and slowing growth in China has weighed on the country’s economic performance in recent quarters, prompting comparisons to the label of the “sick man of Europe” in the late 1990s.
Despite these economic headwinds and concerns about an impending recession, German companies have shown resilience. In Fortune’s Germany is the first ever ranking of the 500 largest companies in Europe by annual turnover and stands out for having the highest representation, with a total of 80 companies in the ranking.
The country’s technical prowess has become known thanks to its long-established automotive industry. Volkswagen ranked second on the list with sales of $293.7 billion, while Mercedes-Benz and BMW ranked ninth and twelfth respectively.
But that’s not all: some of the largest companies in the energy and financial sectors in continental Europe are also based in Germany. For example, Uniper, the state-owned energy company that operates in about 40 countries worldwide, ranks third on the list, while insurance company Allianz occupies fifteenth place on the list. Other big German names include pharmaceutical giant Bayer, airline Lufthansa and sports brand Adidas.
The ranking highlights Germany’s position as a crucial business center in Europe, even as the country struggles to meet the challenges posed by declining trade activity. The country, which is heavily dependent on the manufacturing sector, saw its economy shrink by 0.1% quarter-on-quarter (and 0.4% year-on-year) from July to September, after several months of stagnant growth.
The lagging German economy
Not so long ago, Germany was seen as an “economic superstar”; it is the fourth largest country in terms of gross domestic product and has built a reputation as an industrial power like no other.
However, a confluence of factors has affected the German economy over the past two years.
The Russian invasion of Ukraine put Germany in a difficult position, as the country was heavily dependent on energy imports to meet both the country’s fuel needs and industry. Rising energy prices in the economy kept prices high for much of last year and early this year, and high interest rates persisted.
These forces also pushed the country into a trade deficit in July 2022 for the first time in three decades.
The German manufacturing sector, a historically important sector of the German economy, has been in decline due to sluggish global demand, especially from China.
Supply chain disruptions and increasing competition have also presented new threats to the German automotive industry. In September, industrial production fell by 1.4% more than expected, which was an ominous signal for the coming months.
The country entered a recession earlier this year, and experts believe it is at risk of ending 2023 in a similar fashion.
“Following a recession at the start of 2022-2023 and zero growth in the second quarter of 2023, the economy is in a prolonged period of underperformance, with Germany one of the few countries where GDP is below pre-start levels the war is over. Ukraine (-0.2% between Q1 2022 and Q2 2023),” Stéphane Colliac, an economist specializing in OECD economies at French bank BNP Paribas, wrote in a September research note.
Germany also faces structural challenges, including high corporate taxes and the lack of investment in digitalization, infrastructure and education. These challenges were even acknowledged by Christian Sewing, CEO of Deutsche Bank, in September.
“We will become the sick man of Europe if we don’t tackle these structural problems now,” Sewing said at the Handelsblatt Banking Summit, according to a transcript viewed by Fortune. “Something urgently needs to change here.”
Rocky road ahead
While an overwhelming number of sources, including those in the government, expect the German economy to contract in the fourth quarter, inflation in the country is starting to slow.
In October, inflation fell to a two-year low of 3%, which could mean lower prices for consumers in the coming months.
But given the cocktail of challenges facing Germany, a marked improvement in growth appears unlikely even next year, according to ING’s global head of macro Carston Brzeski.
“It seems that the German economy will remain in the twilight zone between small contraction and stagnation not only this year, but also next year,” he said.