Germany’s economy in transition: What Canadian exporters need to know

For much of the 21^st century, Germany was widely regarded as the key driver of the European economy. Its strength was built on a powerful mix of high-end engineering, a highly skilled labour force and a global reputation for quality.

But that model was shaken by the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine. Germany is now facing a difficult period of economic adjustment.

“Germany’s economy is undergoing a structural shift, but its industrial depth and policy response position it to adapt over time,” says Klaus Houben, Export Development Canada’s (EDC) business development director for Europe.

Germany began importing gas from the Soviet Union in the 1970s, a relationship that later continued with Russia for nearly 50 years. Over time, access to reliable, low-cost gas became a major advantage for German industry, helping energy-intensive sectors, like chemicals and steel, stay competitive globally.

When Russia’s full-scale invasion of Ukraine began in February 2022, the European Union (EU) imposed sanctions that led to Russia cutting off all natural gas supplies to Germany. The impact was severe: Germany’s wholesale natural gas prices skyrocketed from about $30 to $60 per megawatt-hour (MWh) in 2021, to more than $400 per MWh in mid-2022, before easing later that year.

Germany quickly found new gas supplies and built liquefied natural gas (LNG) import capacity to avoid shortages. Even so, energy costs are significantly higher than before the war and German industry has been hit hard.

The chemical industry, a cornerstone of the economy, saw its capacity utilization fall to just 73% in 2025, a considerable drop from the average of 84% recorded between 2014 and 2019 (see Figure 1).

Despite ongoing conflict in the Middle East and elevated energy prices, Germany is better positioned than in 2022 to manage a gas supply shock. It has reduced dependence on a single pipeline route and expanded LNG capacity. The main vulnerability now is price, as global LNG disruptions quickly feed into European benchmarks.

Even before higher energy costs, the pandemic exposed vulnerabilities in Germany’s export-driven manufacturing model.

Just-in-time supply chains—long valued for efficiency—became points of weakness as factories and suppliers shut down. The automotive sector, which accounts for about 17% of German exports, was hit particularly hard, as automakers relied heavily on global suppliers for semiconductors and other components. Production stalled and companies struggled to meet demand.

The recovery has been uneven. Vehicle production rose slightly to 4.15 million passenger vehicles in 2025, from 4.07 million in 2024, but remained about 11% below pre-pandemic levels. Exports also lagged, down 9% from 2019 (see Figure 2).

Employment has declined as well. The German automotive sector employed about 732,000 people in 2025—down 12% from 2019—as it adjusts to electrification and intensifying competition.

As a result, companies are reworking supply chains by diversifying suppliers, increasing inventories and reducing reliance on single regions.

A third major pillar of Germany’s economic success in the 2000s and 2010s was strong demand from China. As China’s economy expanded, exports of German machinery, chemicals and premium vehicles surged.

That dynamic has shifted dramatically. China is now a major global competitor—not just a customer—particularly in electric vehicles. Chinese brands are gaining global market share and eroding the dominance German automakers once held.

China remains essential to German trade, but the balance has changed. Germany now imports more from China than it exports. After briefly falling to second place in 2024, China again became Germany’s largest trading partner from January to September 2025, with about $280 billion in two-way trade—slightly ahead of the U.S. at roughly $277 billion.

Over the same period, German exports to China fell 12.3%, while German imports from China rose 8.5%, widening Germany’s trade deficit (see Figure 3).

These pressures have led to stagnant growth. Germany’s economy now lags behind European peers (see Figure 4), with real gross domestic product (GDP) in 2024 roughly at 2019 levels and only marginal growth (0.2%) in 2025.

Since 2020, Germany has struggled to adapt to a world where cheap energy and open global trade are no longer guaranteed.

Germany remains a key European partner for Canada. In 2024, Canada exported about $6.9 billion—primarily energy and industrial inputs—to Germany, according to Statistics Canada. Imports from Germany totalled $23.6 billion, led by cars and pharmaceuticals.

Investment ties are also significant: In 2024, German foreign direct investment (FDI) in Canada reached $40.3 billion, compared with $16.2 billion in Canadian direct investment abroad (CDIA) in Germany.

Canada and Germany benefit from strong trade ties under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), which reduces tariffs and improves market access for Canadian exporters.

Germany’s transition is creating new opportunities for Canadian firms:

• Energy: As Germany diversifies its energy supply, Canada is well-positioned as a reliable LNG partner.
• Infrastructure and defence: Increased public spending in transport, digital systems and defence is opening opportunities in clean technology, advanced manufacturing and engineering services.
• Critical minerals: Canada’s resource base can help support Germany’s industrial transformation. Learn more in our Trade Matters column, Canada’s critical minerals: Powering Germany’s industrial transition.

Explore EDC’s European market intelligence guide for insights on key markets across the region, including Germany.

The German government has committed to a Zeitenwende—a turning point in security and economic policy—backed by major investment in renewable energy and industrial transformation. The goal is to transform Germany into a leader in climate-neutral manufacturing. If successful, this could provide a new green foundation for German exports.

Since March 2025, Germany has introduced a $750-billion multi-year infrastructure fund to boost spending on transport, digital systems, energy and defence. If implemented effectively, it could strengthen Germany’s long-term growth capacity. Early signs are emerging, including an uptick in orders (see Figure 5).

While a positive development, Germany’s economy remains in transition. The previous reliance on low-cost Russian gas and strong demand from China are gone. The economy is shifting toward a more diversified, digital and energy efficient model that will take time to consolidate.

Energy costs remain elevated, demographic pressures are mounting and competition from China is intensifying across key sectors. Yet, Germany’s commitment to renewable energy and technological upgrading signals a clear direction.

For Canadian firms offering clean technology, critical minerals, digital solutions and supply chain resilience, the opportunity is substantial. There’s also an opportunity to deepen partnerships with German companies seeking to diversify beyond China—particularly in North America. By positioning Canadian capabilities within Germany’s evolving industrial strategy, Canada can help strengthen commercial ties, while enabling Germany’s shift toward a more sustainable and resilient economic model.

If you’re exploring opportunities in Germany or looking to strengthen your export diversification strategy, connect with EDC to get started.