Doha, May 10 (QNA) - QNB reviewed the economic challenges facing the new German government, noting that implementing deeper reforms has become necessary to achieve economic recovery in the country.

The bank's weekly report said that despite the large financial package announced by the government, which includes infrastructure modernization and plans to reform the tax system and labor market, the German economy suffers from a heavy legacy manifested in declining competitiveness and productivity, in addition to a lack of investment in vital sectors.

The report said that the proposed reforms may contribute to stimulating growth in the medium term, but they will not be sufficient without addressing the structural issues that have hindered the growth of the German economy over the past two decades.

The report also addressed the continuing challenges facing the manufacturing sector, including a noticeable slowdown due to a combination of external and internal factors that have affected its performance in recent years.

The report noted that Germany, which emerged as a major economic power in Europe after World War II, has witnessed in the past two decades an exacerbation of structural challenges affecting its economic growth, such as negative demographic trends, increasing regulatory and tax burdens, as well as delays in vital sectors in adapting to digital transformations and rapid developments in the global economy.

The bank said that, as a result of these pressures, Germany’s real GDP has remained flat over the past five years, while the United States recorded growth of 12.2% and the Eurozone 5% during the same period.

The report pointed to the clear contrast between Germany’s traditional approach of adhering to financial discipline and austerity, which helped stabilize the economy in the long run, and the radical shift adopted by the new government by announcing a massive expansionary package that could reach a value of one trillion euros.

It explained that the package includes significant investments in infrastructure and defense, as well as comprehensive reforms to the tax system and labor market, considering this economic shift a departure from the conservative financial approach that has prevailed for decades, and is expected to contribute to stimulating economic growth in the medium term.

The bank said that despite these ambitious policies, the new administration faces a legacy of major challenges that require bold reforms to boost the German economy, which is considered to be in a state of stagnation.

The report discussed three main factors that constitute the most prominent challenges facing the new German government, and which directly affect the prospects for economic growth.

The first is the continued structural pressures that undermine the competitiveness and productivity of the German economy.

In this context, the report relied on assessments from the Global Competitiveness Report, which measures economic performance across a group of countries.

It noted that while Germany ranked sixth globally about a decade ago, it has declined to 24th place, reflecting the impact of regulatory burdens, onerous tax policies, strict employment laws, and administrative complexity.

The bank estimated that the economic cost of excessive bureaucracy in Germany amounts to around 146 billion Euros annually, a clear indicator of the burden that complex administrative procedures impose on the business environment.

The report confirmed that this burden is clearly reflected in performance and productivity indicators, as the productivity of a single worker has declined by 2.5% since 2017.

The second factor addressed by the report concerns weak investment in infrastructure, where modernization is of utmost importance if Germany aims to achieve a new phase of economic growth.

The report noted that the conservative financial policies the country adhered to for many years led to reduced public spending in key infrastructure areas, particularly transport, energy, and technology.

Public investment in Germany averaged around 2.8% of GDP during 2023-2024, compared to 4.3% in France, indicating a clear financing gap.

The report warned that aging infrastructure and delayed digital modernization have become factors hindering long-term economic growth, highlighting the urgent need for substantial reforms and redirecting resources toward strategic investments capable of increasing efficiency and boosting productivity.

The report indicated that the challenges associated with infrastructure modernization in Germany are not limited to a lack of funding, but also include procedural and bureaucratic complexities that delay project implementation.

In many cases, planning and approval processes have taken longer than the construction work itself, resulting in underutilization of available resources. For example, about 76 billion euros of financial allocations were not used in 2023 due to regulatory and administrative hurdles.

The report confirmed that overcoming these obstacles and making infrastructure modernization a strategic priority for the new government is a fundamental condition for regaining growth momentum, noting that the corporate tax cut plan, which is supposed to help stimulate investment, will not begin actual implementation until gradually starting in 2028.

On the other hand, the third factor the report focused on was the decline of the manufacturing sector, which has traditionally been one of the engines of growth in the German economy.

The report said that this decline has become a clear obstacle to overall growth, noting that during the period from 2000 until its peak in 2017, manufacturing achieved an annual growth rate of 1.9% of real GDP.

The report also pointed out that, although the manufacturing sector once enjoyed strong momentum, it has experienced a sharp slowdown in recent years due to a series of successive shocks like global trade tensions, the COVID-19 pandemic, the energy crisis exacerbated by the Russia-Ukraine war, and the continued decline in the automotive industry.

As a result of these challenges, industrial production in Germany has contracted by 18% since 2017.

Although the manufacturing sector may partially benefit from the planned increase in infrastructure and defense investments, the report highlighted that achieving a real recovery requires the new government to provide a more stable and flexible economic environment that can absorb shocks and address the structural challenges hindering sustainable growth. (QNA)