There are dark storm clouds over the German economy that are not going to go away any time soon. The eurozone's largest economy looks set for a technical recession, which Germany has narrowly managed to avoid in recent quarters. It has been officially confirmed that the economy contracted slightly in the second quarter, and there are increasing signs that the gross domestic product will also fall in the current three-month period.

Exports, which are so important for Germany, are weakening. Contrary to economists' hopes, consumption is still not providing any growth impetus. Worries about job security are currently dampening the mood of many consumers.

What is much worse, however, is that the German economy not only hardly grew at all from 2019 to 2023 in price-adjusted terms, but that the current economic weakness will reduce economic growth over the coming years. Corporate investment in Germany is shrinking quarter by quarter. The investment backlog in public areas such as infrastructure is also increasing due to the rigid corset of the debt brake. Foreign investors are also increasingly complaining about business location conditions in Germany, and in some cases can only be enticed to invest in Germany with the help of subsidies.

Yet Germany urgently needs more investment. Not only to boost the weak economy. But even more importantly, in order to avoid jeopardising the competitiveness of the location in international comparison, in the medium term. Without spending by the private sector and the state on future technologies such as artificial intelligence, the education system and infrastructure, productivity in Germany will not increase. But this is exactly what is needed to compensate for demographic change –immigration alone will not achieve this.

There is one bit of good news for the ECB in the dismal German economic data. Even significantly higher real wages do not necessarily lead to higher consumer spending and therefore possibly greater inflationary pressure – at least not in the eurozone's largest economy. The advocates of a more restrictive monetary policy in the ECB Governing Council could now find it somewhat easier to cut interest rates further this year.