‘Bad numbers, bad mood’: Recession hits Germany’s Mittelstand

Deguma, a small business in the central German town of Geisa, makes machines for processing rubber and plastic. The problem is that right now, no one’s in the mood to buy them. 

“We’re getting a lot of inquiries, but people keep putting off placing orders,” said Viktoria Schütz, Deguma’s managing director. “There’s this reluctance to invest a lot in new machines.”

Deguma is not alone. Across the Mittelstand, the ecosystem of small and medium-sized enterprises that form the backbone of the German economy and employ 33mn people, orders are down as customers hold back.

Germany is experiencing its first two-year recession since the early 2000s. Falling production in energy-intensive sectors like chemicals and growing competition from China in industries Germany excels in, like cars, are raising questions about the future of its export-led business model.

There are also few signs of a recovery, at least not any time soon. In its latest forecast the IMF says German GDP will expand by just 0.8 per cent next year. Of the world’s largest and richest economies, only Italy is forecast to grow as slowly.

Companies have responded to the downturn by tightening their belts and putting off big acquisitions. That means they’re less likely to purchase new kit. “Private investments in equipment have been in free fall for the past four quarters,” a joint report by Germany’s leading economic institutes said in late September.

Chancellor Olaf Scholz has admitted that Germany is stuck in a rut, but has appealed for more positivity. “We have to get out of this bad situation where bad numbers create a bad mood and a bad mood leads to even worse numbers,” he told a conference on Tuesday.

The reasons for the broader downturn are clear. German industry had barely recovered from pandemic-related disruptions to global supply chains when Russia’s invasion of Ukraine sent energy prices soaring. Inflation and interest rates followed suit. 

Those factors have eased in recent months, but now Germany’s more deep-seated, structural problems are coming to the fore — a dire shortage of skilled workers, high labour costs and a proliferation of red tape that business leaders say is hobbling the country’s competitiveness.

Perhaps an even bigger problem is political uncertainty. Companies have been dismayed by the near-constant infighting within Scholz’s coalition, a rickety alliance of social democrats, greens and liberals. Frequent arguments over policy have fuelled speculation that the coalition could fall apart, triggering snap elections.

“Things are really going downhill,” said Thorsten Weber, managing director of KKE System, a Geisa firm that makes refrigeration equipment. “We need change, and change right at the top, because the fish rots from the head.”

Local politicians point an accusing finger at the Greens, who they say are burdening business with climate-related regulation. “The government is implementing ideological climate concepts with brute force, instead of trying to take people with them,” said Manuela Henkel, mayor of Geisa.

Such sentiments are common in Thuringia, the east German state where Geisa is located and where the far-right Alternative for Germany won regional elections in September. In a recent survey of local businesses, 63 per cent said the biggest threat they faced was the “economic policy environment” — things like bureaucracy, high taxes and unstable laws.

“This is the main cause of Germany’s malaise — it’s literally making this country ill,” said Torsten Herrmann, managing director of Hehnke GmbH, a small engineering firm an hour’s drive east of Geisa, and head of the local chamber of commerce that carried out the survey.

Companies were also labouring under a “threadbare infrastructure” resulting from “years of under-investment in railways and roads”. “For years the strong international demand for German-made products papered over these problems,” he said. “But that’s over now.”

Deguma exemplifies the challenges that have faced German companies in recent years. In Schütz’s telling, the company thrived after the global financial crisis, a period when Germany saw 10 straight years of economic growth, the highest levels of employment since reunification and booming exports to China.

But since 2019, when she took over management, “we’ve been in permanent crisis mode”. “Ever since then we’ve been swerving to avoid things coming at us,” she said. “It’s totally frustrating.”

The latest obstacle in its path — turmoil in the German car industry that has affected many of Deguma’s biggest potential clients. Volkswagen symbolises the crisis: hit by weak demand for electric cars in Europe and a loss of market share in China, it recently announced plans to close some of its German factories for the first time in its history.

Herrmann says Hehnke, which produces plastic components for sensor systems in cars, expects a 20 per cent decline in revenue this year, as demand from carmakers erodes.

Hehnke is not alone. This month US car parts manufacturer Lear closed a factory in Eisenach, an hour’s drive from Geisa, that makes car seats for Opel. AE Group, a maker of aluminium parts for cars based in nearby Gerstungen, went into insolvency in August. 

The Thuringian town of Brotterode-Trusetal has been particularly hard hit. This year, three auto suppliers based there — car-seat producer Grammer, headlamp maker Marelli and BOS Plastics Systems, which makes armrests — have said they would close their factories.

Such moves are beginning to feed through into Germany’s unemployment statistics. A survey by tech group Datev this week showed that employment in the Mittelstand declined in the month of September for the first time in three and a half years. Meanwhile a poll by state development bank KfW found that only 60 per cent of Mittelstand companies had fully implemented their planned investments in 2023.

The travails of companies like Deguma and Hehnke are not the whole story. Some Thuringian firms have not only weathered the storm but are growing fast. Notably those with connections to Germany’s boom industries — areas like renewables, energy networks and the circular economy.

One is KKE-System. It makes heat pumps as well as cooling systems running on CO₂, which has lower greenhouse gas potential than other refrigerants. The order books could be a bit fuller, said Weber, but he “definitely” expects an improvement in 2025. 

“People have been holding back on investing, but next year they’ll start again,” he said. “Food retailers have to reach their climate goals, and they can only do that with CO₂-based, climate-neutral systems like ours.”

Just opposite KKE-System in the same industrial park is GNV, another company riding the green transition. It makes manifolds for heat pumps and geothermal energy projects, and has seen a 400 per cent increase in orders for its larger projects this year.

“We are growing in every respect — workforce, revenues, profits,” said Sandro Neumann, head of GNV. It had seven employees till the end of 2022, but now boasts 20. Neumann expects that to rise to more than 30 by the end of next year. He is also about to start construction on a new production hall. “At the moment we’re bursting at the seams.”

For Neumann, GNV is typical of the Mittelstand — nimble, quick and innovative. “You can’t do what we do in a big company with thousands of employees,” he said. “Our hierarchies are flat, our development times unbelievably short, and the workers provide all the input.” 

GNV gambled early on Germany’s heating revolution. The Eurozone’s largest economy is gradually shifting away from heating systems based on fossil fuels to those using renewable energy, and nothing can stop that, Neumann said.

“Climate change is happening — we can’t explain it away,” he added. “And it’s going to bring new industries with it. A whole new branch of the economy.”

Data visualisation by Alex Irwin-Hunt