BERLIN—Two decades ago, Germany revived its moribund economy and became a manufacturing powerhouse of an era of globalization.

Times changed. Germany didn’t keep up. Now Europe’s biggest economy has to reinvent itself again. But its fractured political class is struggling to find answers to a dizzying conjunction of long-term headaches and short-term crises, leading to a growing sense of malaise.

Germany will be the world’s only major economy to contract in 2023, with even sanctioned Russia experiencing growth, according to the International Monetary Fund.

Germany’s reliance on manufacturing and world trade has made it particularly vulnerable to recent global turbulence: supply-chain disruptions during the Covid-19 pandemic, surging energy prices after Russia invaded Ukraine, and the rise in inflation and interest rates that have led to a global slowdown.

At Germany’s biggest carmaker Volkswagen, top executives shared a dire assessment on an internal conference call in July, according to people familiar with the event. Exploding costs, falling demand and new rivals such as Tesla and Chinese electric-car makers are making for a “perfect storm,” a divisional chief told his colleagues, adding: “The roof is on fire.”

The problems aren’t new. Germany’s manufacturing output and its gross domestic product have stagnated since 2018, suggesting that its long-successful model has lost its mojo.

China was for years a major driver of Germany’s export boom. A rapidly industrialising China bought up all the capital goods that Germany could make. But China’s investment-heavy growth model has been approaching its limits for years. Growth and demand for imports have faltered.

Instead of Germany’s best customers, Chinese industries have become aggressive competitors. Upstart Chinese carmakers are competing with German incumbents such as VW that are lagging in the electric-vehicle revolution.

More broadly, the world has become less favourable to the kind of open trade that benefited Germany. The shift was expressed most clearly in then-President Donald Trump imposing tariffs not only on imports from China but also those of U.S. allies in Europe. The U.K.’s 2016 decision to leave the European Union and Russia’s annexation of Crimea in 2014, leading to EU sanctions, also signaled a shift toward a more hostile environment for big exporters.

Germany’s long industrial boom led to complacency about its domestic weaknesses, from an ageing labor force to sclerotic services sectors and mounting bureaucracy. The country was doing better at supporting old industries such as cars, machinery and chemicals than at fostering new ones, such as digital technology. Germany’s only major software company, SAP, was founded in 1975.

Years of skimping on public investment have led to fraying infrastructure, an increasingly mediocre education system and poor high-speed internet and mobile-phone connectivity compared with other advanced economies.

Germany’s once-efficient trains have become a byword for lateness. The public administration’s continued reliance on fax machines became a national joke. Even the national soccer teams are being routinely beaten.

“We’ve kind of slept through a decade or so of challenges,” said Moritz Schularick, president of the Kiel Institute for the World Economy.

In March, one of Germany’s most storied companies, multinational industrial-gas group Linde, delisted from the Frankfurt Stock Exchange in favor of maintaining a sole listing on the New York Stock Exchange. The decision was driven in part by the growing burden of financial regulation in Germany. But also, Linde, whose roots go back to 1879, said it no longer wanted to be perceived just as German—an association that it believed was depressing its appeal to investors.

Germany today is in the midst of another cycle of success, stagnation and pressure for reforms, said Josef Joffe, a longtime newspaper publisher and a fellow at Stanford University.

“Germany will bounce back, but it suffers from two longer-term ailments: above all its failure to transform an old-industry system into a knowledge economy, and an irrational energy policy,” Joffe said.

“I think it’s important to remember that Germany is still a global leader,” German Finance Minister Christian Lindner said in an interview. “We’re the world’s fourth-largest economy. We have the economic know-how and I’m proud of our skilled workforce. But at the moment, we are not as competitive as we could be,” he said.

Germany still has many strengths. Its deep reservoir of technical and engineering know-how and its specialty in capital goods still put it in a position to profit from future growth in many emerging economies. Its labor-market reforms have greatly improved the share of the population that has a job. The national debt is lower than that of most of its peers and financial markets view its bonds as among the world’s safest assets.

The country’s challenges now are less severe than they were in the 1990s, after German reunification, said Holger Schmieding, economist at Berenberg Bank in Hamburg.

Back then, Germany was struggling with the massive costs of integrating the former Communist east. Rising global competition and rigid labor laws were contributing to high unemployment. Spending on social benefits ballooned. Too many people depended on welfare, while too few workers paid for it. German reliance on manufacturing was seen as old-fashioned at a time when other countries were betting on e-commerce and financial services.

After a period of national angst, then-Chancellor Gerhard Schröder pared back welfare entitlements, deregulated parts of the labor market and pressured the unemployed to take available jobs. The controversial reforms split Schröder’s Social Democrats, and he fell from power.

Private-sector changes were as important as government measures. German companies cooperated with employees to make working practices more flexible. Unions agreed to forgo pay raises in return for keeping factories and jobs in Germany.

Germany Inc. grew leaner. Meanwhile, the world was demanding more of what Germans were good at making, including capital goods and luxury cars.

China’s sweeping investments in industrial capacity powered the sales of machine-tool makers in Bavaria and Baden-Württemberg. VW invested heavily in China, tapping newly affluent consumers’ appetite for German cars.

Schröder’s successor, longtime Chancellor Angela Merkel, presided over years of growth with little pressure for further unpopular overhauls. Booming exports to developing countries helped Germany bounce back from the 2008 global financial crisis better than many other Western countries.

Complacency crept in. Service sectors, which made up the bulk of gross domestic product and jobs, were less dynamic than export-oriented manufacturers. Wage restraint sapped consumer demand. German companies saved rather than invested much of their profits.

Successful exporters became reluctant to change. German suppliers of automotive components were so confident of their strength that many dismissed warnings that electric vehicles would soon challenge the internal combustion engine. After failing to invest in batteries and other technology for new-generation cars, many now find themselves overtaken by Chinese upstarts.

A recent study by PwC found that German auto suppliers, partly through reluctance to change, have suffered a loss of global market share since 2019 as big as their gains in the previous two decades.

More German businesses are complaining of the growing density of red tape.

BioNTech, a lauded biotech firm that developed the Covid-19 vaccine produced in partnership with Pfizer, recently decided to move some research and clinical-trial activities to the U.K. because of Germany’s restrictive rules on data protection.

German privacy laws made it impossible to run key studies for cancer cures, BioNTech’s co-founder Ugur Sahin said recently. German approvals processes for new treatments, which were accelerated during the pandemic, have reverted to their sluggish pace, he said.

Germany ought to be among the nations winning from advances in medical science, said Hans Georg Näder, chairman of Ottobock, a leading maker of high-tech artificial limbs. Instead, operating in Germany is getting evermore difficult thanks to new regulations, he said.

One recent law required all German manufacturers to vouch for the environment, legal and ethical credentials of every component’s supplier, requiring even smaller companies to perform due diligence on many foreign firms, often based overseas, such as in China.

Näder said his company must now scrutinise thousands of business partners, from software developers to makers of tiny metal screws, to comply with regulation. Ottobock decided to open its latest factory in Bulgaria instead of Germany.

Energy costs are posing an existential challenge to sectors such as chemicals. Russia’s war on Ukraine has exposed Germany’s costly bet on Russian gas to help fill a gap left by the decision to shut down nuclear power plants.

German politicians dismissed warnings that Russian President Vladimir Putin used gas for geopolitical leverage, saying Moscow had always been a reliable supplier. After Putin invaded Ukraine, he throttled gas deliveries to Germany in an attempt to deter European support for Kyiv.

Energy prices in Europe have declined from last year’s peak as EU countries scrambled to replace Russian gas, but German industry still faces higher costs than competitors in the U.S. and Asia.

German executives’ other complaints include a lack of skilled workers, complex immigration rules that make it hard to bring qualified workers from abroad and spotty telecommunications and digital infrastructure.

“Our home market fills us with more and more concern,” Martin Brudermüller, chief executive of chemicals giant BASF, said at his annual shareholders’ meeting in April. “Profitability is no longer anywhere near where it should be,” he said.

One problem Germany can’t fix quickly is demographics. A shrinking labor force has left an estimated two million jobs unfilled. Some 43% of German businesses are struggling to find workers, with the average time for hiring someone approaching six months.

Germany’s fragmented political landscape makes it harder to enact far-reaching changes like the country did 20 years ago. In common with much of Europe, established centre-right and centre-left parties have lost their electoral dominance. The number of parties in Germany’s parliament has risen steadily.

Chancellor Olaf Scholz and his Social Democrats lead an unwieldy governing coalition whose members often have diametrically opposed views on the way forward. The Free Democrats want to cut taxes, while the Greens would like to raise them. Left-leaning ministers want to greatly raise public investment spending, financed by borrowing if needed, but finance chief Lindner rejects that. “We need fiscal prudence,” Lindner said.

Senior government members accept the need to cut red tape, as well as for an overhaul of Germany’s energy supply and infrastructure. But party differences often hold up even modest changes. This month the Greens lifted a veto of Lindner’s proposal to reduce business taxes only after they extracted consent for more welfare spending. As part of the deal, the government agreed to pass another law drafted by one of Lindner’s allies, Justice Minister Marco Buschmann, to trim regulation for businesses.

Scholz recently rejected gloomy predictions about Germany. Changes are needed but not a fundamental overhaul of the export-led model that has served Germany well throughout the post-World War II era, he said in an interview on national TV recently.

He cited the inflow of foreign investment into the microchips sector by companies such as Intel, helped by generous government subsidies. Scholz said planned changes to immigration rules, including making it easier to qualify for German citizenship, would help attract more skilled workers.

But Scholz has struggled to stop the infighting in his coalition. The government’s approval ratings have tanked, and the far-right populist Alternative for Germany party has overtaken Scholz’s Social Democrats in opinion polls.

“The country is being led by a bunch of Keystone Kops, a motley coalition that can’t get its act together,” Joffe said.

Workers are waking up to emails and team-meeting requests with a jarring message: They aren’t fired, but their jobs are gone.

People on the receiving end of these memos describe running through a range of emotions, from relief that they’re still employed to a sense of dread that their bosses secretly want them to leave. They are also facing a labor market that isn’t as robust as a year ago, leaving many to believe that the best option is to stay put and hunt internally for a better fit.

Adidas, Adobe, IBM and Salesforce, among others, have reassigned employees as part of corporate restructurings. Mentions of reassignment, or similar terms, during company earnings calls more than tripled between last August and this month, according to data from AlphaSense, a financial-research platform.

“Reassigning is definitely a huge part of the dynamic right now,” said Andy Challenger, senior vice president at Challenger, Gray & Christmas, an outplacement firm.

For companies that spent several years—and significant money—to hire top talent, reassigning workers to new roles can be a way to fill jobs vital to future plans while trimming costs associated with old strategies, say human-resources executives.

It can also be a waiting game. Employees to whom it would be costly to pay severance or months of unemployment benefits might decide to leave on their own if they feel stuck in a job they don’t want, executive coaches say.

U.S.-based companies announced 42% fewer job cuts in July than they did in June, Challenger said. July job cuts were also 8% lower than the prior-year period, marking the first time this year that monthly job cuts were lower than in 2022.

In interviews and online forums, many workers said they worried whether their reassignment meant they would eventually be pushed out the door. They also wondered how to work their way out of job purgatory and back into a position they actually want.

“I got the sense that it was like: ‘We appreciate everything you did so we didn’t lay you off, so you can either make the best of this or go find another job somewhere else,’ ” said Matt Conrad, a 34-year-old senior sales-enablement specialist at IBM who went through two reassignments in two years before landing his current role last fall.

In Conrad’s first reassignment in 2021, a manager scheduled a call to notify him that his manager role was eliminated. He was given a new job selling software he had no experience with, a move he said took a toll on his mental health.

Later that year, Conrad found a new job at IBM through a former manager that was better suited to his skill set. Then, in January 2022, that team was eliminated and he was reassigned again. Conrad asked the HR department to help him to find his remote, senior sales-coach role, a process that took six months.

Not quitting when he was reassigned was a matter of principle, he said: “I wouldn’t give in because I was a top performer and it just wasn’t fair.”

IBM didn’t respond to requests for comment.

Getting caught up in a reorganisation can create anxiety for workers, but it’s sometimes a genuine move on the company’s part to avoid letting people go, said Roberta Matuson, an executive coach and adviser to businesses including General Motors and Microsoft on human-resources issues.

“They’re basically signalling to you: ‘Look, this is the only way for me to have a job here for you, I need to reassign you, so wink, wink, if I were you, I would take the assignment,’ ” she said.

Other times, workers are purposefully pushed into jobs management knows they will be miserable in, prompting them to quit.

“They could be putting you out to pasture,” Matuson said.

Signals to look for include reassignment to a job that is far below the pay or skill level you currently have, Matuson said. Other warning signs: Being offered a role that requires relocating when your boss knows moving isn’t a viable option for you, or being reassigned to a division that’s rumoured to be on the chopping block.

Employees suspicious or nervous about a reassignment should ask their managers why, specifically, it’s happening and what the reassignment means for their career path, said Naomi Sutherland, a global lead of talent development with Korn Ferry, a consulting firm. The answers could reveal whether a job transfer is personal.

Without good information, “people are going to fill a void of information with whatever story they’re going to tell themselves,” she said.

Most of the time, there is little legal recourse for workers if their company reassigns them, employment lawyers say.

One exception is when a worker can demonstrate the reassignment was retaliatory, said Angela L. Walker, an employment attorney with Blanchard & Walker in Ann Arbor, Mich. The bar is high, she added. The employee would have to show prior evidence of discriminatory treatment or that they were unfairly singled out.

“I’ve seen lots of examples in my practice where employees are told they’re being let go in a ‘restructuring’ and it turns out that they’re the only one affected, or they’re the only one affected in their group,” Walker said.

Grant Gurewitz, 32, said it took time to adjust to a new role in Seattle earlier this year when his software company eliminated his position as head of growth marketing for employee experience in North America. He was given 24 hours to make a choice between two other jobs, or leave. He picked a global head of growth marketing role that came with more responsibilities but without a pay increase.

He chose to look on the bright side, because a global role probably would’ve been the next position he wanted and it builds on his existing skill set.

“There’s still a lot of runway for me to learn and grow and develop in this role, which is the glass-half-full approach to all of this that’s happened,” he said.

The prime years for making smart financial decisions are, on average, 53 and 54.

At around that age, people have accumulated knowledge and experience about money, spending and saving, but haven’t begun losing key analytic cognitive skills. It’s also roughly the age when adults make the fewest financial mistakes, related to things like credit-card use, interest rates and fees.

Knowing what leads to the financial strength of your early 50s is valuable. Younger adults can delve more deeply into basics like inflation and interest rates to hedge against lack of experience, and those who are older can work to keep their analytical skills sharp.

“As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products or strategies are better,” says Rafal Chomik, an economist in Australia at the ARC Centre of Excellence in Population Ageing Research.

Chomik led a 2022 study that looked at financial literacy, which is the ability to understand financial information and apply it to managing personal finances. Financial literacy typically peaks at age 54 and then declines, according to the study.

The study gauged financial literacy using questions about inflation, interest rates and diversification. One question: If in five years, your income has doubled and prices have doubled, will you be able to buy (A) less, (B) the same, (C) more than today. (Answer: B)

People can—and do—make good financial decisions from their 20s to their 40s, as well as into their 60s and 70s. Chomik, who is 45, says some of his best financial decisions came earlier in his life and involved his 401(k)-type savings account. Contributions were mandatory when he started his first job at around age 18, but once enrolled, he actively chose funds that benefit those who have a longer investment horizon.

Financial decision-making requires a combination of reasoning skills that differ by age. Those in their 20s are better at absorbing and processing new information and computing numbers—so-called fluid intelligence—but don’t have as much life experience or crystallised intelligence—the accumulation of facts and knowledge. Crystallised intelligence tends to improve with age.

Getting help

Beverly Miller, a financial coach who often works with people who are in debt, says she did most things right before her 50s, avoiding credit-card debt, paying off car loans and paying off a 30-year mortgage in 12 years.

But she didn’t invest as wisely as she could have. For example, she moved money in a retirement savings account out of growth funds and into fixed-income funds.

“We would let market changes scare us into making changes we shouldn’t have,” says Miller, 65.

Miller says she and her husband could have made more money if they had left it in growth funds. Likewise, she invested in rental properties, which she thought could be an easy source of income but weren’t.

It wasn’t until she was in her 50s that she and her husband finally turned to a certified financial planner to help with investments, she says.

“In your 50s, you have enough maturity and experience to know you need help,” says Miller.

Age of reason

People make financial mistakes at any and every age, but they made fewer mistakes at the age of 53, according to economic researchers. In one study, economists looked at financial choices made by adults in 10 financial areas, including home-equity loans, lines of credit, mortgages and credit cards, and how those decisions affected fees and interest payments.

Fees and interest payments, across all 10 areas, are at their lowest levels around age 53, according to the 2009 study in the Brookings Papers on Economic Activity. That age was referred to as the “age of reason,” or the point at which financial mistakes are minimised. A financial mistake would include overestimating the value of a house, for instance.

At the age of 53, “people have been dealing with financial markets for years and know how to look for the right financial product, and minimise fees and payments,” says Sumit Agarwal, a professor of finance at the National University of Singapore and an author of the study.

Agarwal turned 53 this year.

“I have a lot of experience capital right now,” he says. “Going forward, I will be making more mistakes and will be slower making decisions.” People can keep their analytical skills strong and continue to make good decisions by reading and exercising the brain, he says.

One financial mistake 50-year-olds tend to make involves underestimating their life expectancy, which can lead to flawed planning decisions about retirement. A typical 50-year-old expects to live until age 76, when actuarial estimates have that person living another decade to age 86, according to Chomik’s study, which looked at surveys in Australia. A 2020 study in the U.S. found that 28% of adults 50 and older underestimated their life expectancy by at least five years.

Kristen Jacks, a 55-year-old financial educator based in New Haven, Conn., says people in their 50s have often experienced enough financial pain to make them more acutely aware of the need to weigh all financial alternatives carefully and avoid mistakes.

“You’re also at the age when you look at your retirement savings and realise you’re running out of years to make it bigger,” says Jacks.

She also works with younger people who can underspend as well as overspend. One young man in his 20s, she says, earned good money as a traveling nurse but was living in a small $600 a month apartment that he hated.

She says her own best financial decisions are lifelong habits. Jacks, who bought a $1,500 certificate of deposit when she was 15 using babysitting money, doesn’t accumulate credit-card debt and lives below her means.

“You do that for 20-plus years, and you are so much better off,” she says.