Recent figures show that Germany's economy is beginning to recover, although the improvement remains fragile. After two years of recession, the European Commission expects growth of 0.6% in 2026, following just 0.2% in 2025. The ifo Institute is more optimistic, forecasting growth of 1.4% this year and 1.2% in 2027. Its September forecast also points to stronger public spending and export demand as important drivers.

The latest official figures, however, illustrate why talk of a revival needs qualification. Gross domestic product increased by 0.2% in the second quarter, while the first quarter's growth was revised upwards to 0.4%. Yet industrial production fell by 1.1% in July, including a 9.2% monthly decline in automotive production. The government's August economic report also recorded inflation of 2.8% in July, up from 2.3% in June.

Few sectors better illustrate Germany's economic predicament than its automobile industry. Volkswagen's difficulties are not simply a matter of a difficult year or a dispute over wages. They reflect a longer-term change in the competitive environment.

As The Economist has argued, Volkswagen's dependence on relatively expensive German workers and factories became a problem and then a crisis. Since 2019, annual sales have fallen by around two million vehicles, to approximately nine million in 2025, while Chinese manufacturers have intensified competition both in China and abroad.

The wider challenge is that Germany's industrial model is being tested simultaneously by technological change, energy costs and international competition. Electric vehicles, batteries and other emerging technologies require investment and new capabilities, while established manufacturers must reconsider production structures that were built around a different market. The question is therefore not only how many cars Germany produces, but what it can produce competitively in the future.

Volkswagen's experience also shows why the transition is difficult for workers. Cost-cutting, factory restructuring and negotiations with unions are not separate from the industrial transformation; they are part of it. The issue is how companies can remain competitive while managing the employment consequences of changing production models.

That uncertainty provides important context for Germany's regional elections. In Saxony-Anhalt, where voters went to the polls on the first Sunday in August, surveys identified the economy and social security as the most important problems, ahead of education and migration, asylum and integration. The election therefore offered a direct expression of concerns about economic security, public services and future prospects.

The result saw a major gain for the Alternative for Germany (AfD), which won nearly 44% of the vote, while the CDU received 17.3%. The AfD's regional branch has been classified as "confirmed right-wing extremist" by Saxony-Anhalt's domestic intelligence service since 2023; the party is challenging that classification in court. The election result is widely seen as a threat to democracy, and attention is currently on coalition formation, since the AfD lacks an outright majority and other parties have ruled out cooperation with it.

Saxony-Anhalt's position in eastern Germany is significant in understanding the election outcome. Although the region has developed considerably since reunification, economic differences with western Germany remain part of the political landscape. In Saxony-Anhalt, social security is particularly important as it has the lowest average net income among Germany's federal states and a relatively large older population dependent on pensions or approaching retirement.

The economic dimension is particularly important because the AfD has gained ground on the question of economic competence. Yet its proposed solutions do not necessarily resolve the structural problems facing the state. Its programme calls for a modernised economy while also supporting the combustion engine, and proposes addressing labour shortages through higher birth rates. The latter would, by its nature, take decades to affect the labour market.

The shortage of skilled workers is one of the clearest links between Germany's economic and political challenges. In Saxony-Anhalt, an ageing population means that many workers will retire in the coming years. It is estimated that 360,000 people could leave the labour market over the next decade, compared with around 190,000 expected to enter it. Nationally, a shortage of around 4.3 million workers is projected within ten years.

That makes the question of migration economically significant. Economists warn that an AfD-led government could make Saxony-Anhalt less attractive to skilled workers and companies. Without an inflow of workers from outside the state, labour shortages would intensify and investment could suffer.

The implications extend beyond one federal state. Germany's industrial recovery will depend not only on investment and technology, but also on its ability to attract and retain the people needed to operate its factories, hospitals and businesses. In that sense, the debate over economic policy is inseparable from the country's demographic future.

The Saxony-Anhalt election therefore brings Germany's economic and political questions into sharp focus. A modest recovery may be under way, but it is not yet a solution to the structural pressures facing the country. For the federal government, the challenge is to turn improving economic figures into a recovery that is visible in people's everyday lives, while ensuring that Germany remains competitive in a changing industrial world.

Dr Lina Klesper is an International Legal Assistant at PKF Malta