China shock emerges as key reason for Germany's economic stagnation

Alternative for Germany seeks first state governor in Saxony-Anhalt

Germany’s economic core is the production and export of big-ticket, complex goods that keep global business running — cars, locomotives, factory machinery, aircraft and construction equipment. That growth model now faces serious pressure from a new competitor whose exports can often match or approach German quality and sell for far less: China.

Economists call the phenomenon the “China shock,” and it is emerging as a key reason for Germany’s chronic economic stagnation since the COVID-19 pandemic.

The stagnation has political consequences. The sluggish economy has helped make Chancellor Friedrich Merz’s governing coalition unpopular ahead of an election Sunday in the eastern region of Saxony-Anhalt.

There, the far-right Alternative for Germany has its best chance yet of getting its first state governor.

For German industry, the pressure reverses an older trade relationship. German companies once reaped fat profits selling to China. The tables have turned as Beijing supports companies in targeted sectors — often sectors where German companies make competing goods.

China’s goods cannot find enough buyers in China’s currently tepid economy, so they are shipped to foreign markets, including Europe.

That puts Chinese products in direct competition with German-made goods in Europe, at the same time that German companies face a harder market in China itself, where Beijing now backs local competitors in the same industries.

Sunday’s election in Saxony-Anhalt will test the political consequences of the stagnation, with the far-right Alternative for Germany entering the vote with its best chance yet of getting its first state governor.