Market Overview

The German economy is the world's fourth largest and, after the expansion of the EU, accounts for nearly one-fifth of European Union GDP.  Germany is the United States' largest European trading partner and is the sixth largest market for U.S. exports. Germany’s "social market" economy largely follows free-market principles, but with a considerable degree of government regulation and generous social welfare programs.

Germany is the largest consumer market in the European Union with a population of over 82 million.  However, the significance of the German marketplace goes well beyond its borders.  An enormous volume of worldwide trade is conducted in Germany at some of the world’s largest trade events, such as Medica, Hannover Fair, Automechanika, and the ITB Tourism Show.  The volume of trade, number of consumers, and Germany’s geographic location at the heart of a 27-member European Union that added ten members in 2004, and two more in 2007 make it a keystone around which many U.S. firms seek to build their European and worldwide expansion strategies.

Market Challenges

Real German GDP expanded by 1.3% in 2008 despite the increasing financial turmoil, which began to affect industrial exports; forecasters predict that Germany would register annual economic growth of 1.7% in 2008 and that GDP would decline by more than 2% in 2009.  Consumer demand, which had a temporary uptick after years of sluggishness, is declining again.  Germany suffered the most dramatic drop in exports of any major Western European economy in 2008. Business confidence indices sank steadily in 2008 in the face of great uncertainty in financial markets.  The German economy continues to suffer from structural problems, including over-regulation in labor markets, taxation, and business establishment, as well as high social insurance costs.

The German government’s plans for reform have taken a back seat to the more pressing concerns of addressing a major downturn.  Most observers believe that additional reforms to enhance Germany’s global competitiveness are unlikely to occur before federal elections in 2009.

Persistent high unemployment, particularly long-term (longer than one year) unemployment, has long been among Germany’s most serious political and economic problems. The economic growth Germany experienced between 2006 and 2008 rapidly reduced unemployment to levels not seen since before German unification, but forecasters expect a significant rise in unemployment in 2009.

In spite of the deepening crisis, the German labor market displayed remarkably robust growth until year-end 2008 although employment growth flattened during the course of the year.  In 2008, the average unemployment rate was 7.8 percent or 3.268 million, down from 9.0 percent or 3.776 million in 2007.  This was the lowest average annual unemployment since 1992.  In eastern Germany, the average unemployment rate was 13.1 percent, still more than twice as high as in the western part of the country (6.4 percent). For the first time since February 2006, unemployment rose (by 18,000 to 7.6 percent) in December 2008.  The number of persons employed rose to a record high of 40.83 million in November 2008 (500,000 more than in November 2007).  However, the relative increase of 1.2 percent was the lowest rate of growth since December 2006.  Although it often takes several months before the labor market reflects macroeconomic shifts, developments now show that the downturn has reached the labor market.  The Federal Employment Agency’s Institute for Employment Research (IAB) reversed its more optimistic forecast from October 2008 and projected unemployment figures to rise in 2009, maybe by up to 500,000 or more.  The common denominator of most economic forecasts at the beginning of the year 2009 was that non-seasonally adjusted unemployment could exceed 4 million in early 2010 and lift the unemployment rate from slightly under 8 to 9.5 percent.  

Germany presents few formal barriers to U.S. trade or investment although Germany’s participation in the EU’s Common Agricultural Policy and German restrictions on biotech agricultural products mean barriers for some U.S. goods.  Germany has pressed the new EU Commission to reduce regulatory burdens and promote innovation to increase EU member states’ competitiveness.  The Merkel government has talked about the need for regulatory reform in Germany as well. Germany's regulations and bureaucratic procedures can prove baffling. While not directly discriminatory, government regulation is often complex and may offer a degree of protection to established local suppliers. Safety or environmental standards, not inherently discriminatory but sometimes zealously applied, can complicate access to the market for U.S. products. American companies interested in exporting to Germany should make sure they know which standards apply to their product and obtain timely testing and certification. German standards are especially relevant to U.S. exporters because, as EU-wide standards are developed, they are often based on existing German ones.

Market Opportunities

For U.S. companies, the German market - the largest in the EU - continues to be attractive in numerous sectors and remains an important element of any comprehensive export strategy to Europe. While U.S. investors must reckon with a relatively higher cost of doing business in Germany, they can count on high levels of productivity, a highly skilled labor force, quality engineering, a first-class infrastructure, and a location in the heart of Europe.

Market Entry Strategy

The most successful market entrants are those that offer innovative products featuring high quality and modern styling.  Germans are responsive to the innovation and high technology evident in U.S. products, such as computers, computer software, electronic components, health care and medical devices, synthetic materials, and automotive technology.  Germany boasts one of the highest Internet access rates in the EU and new products in the multi-media, high tech, and service areas offer great potential as increasing numbers of Germans join the Internet generation.  Certain agricultural products also represent good export prospects for U.S. producers.  Price will not necessarily be the determining factor for the German buyer, given the German market’s demand for quality.

The German market is as decentralized and diverse as the U.S. market, with interests and tastes that differ dramatically from German state to German state.  Successful market strategies take into account regional differences as part of a strong national market presence.  Experienced representation is a major asset to any market strategy given that the primary competitors for most American products are domestic firms with established presence.  U.S. firms can overcome such stiff competition by offering high quality products, services at competitive prices, and sales back-up, as well as establishing a local network of support.  For investors, Germany’s relatively high marginal tax rates and complicated tax laws may constitute an obstacle, although deductions, allowances and write-offs help to move effective tax rates to internationally competitive levels.