Economic slack instead of the hoped-for upswing: The German economy seems to be stuck in a low state after growing last year despite the energy crisis and high inflation.
In its latest economic forecast, the International Monetary Fund assumes that the economy is the only one of the more than 20 countries and regions examined in which economic output will fall slightly this year. The term “Sick Man of Europe”, which the British magazine “Economist” used to describe Germany around the turn of the millennium, is making the rounds.
The Federal Statistical Office will announce how the economy developed in the second quarter of 2023 this Friday (10 a.m.). Previously, gross domestic product had shrunk for two quarters in a row compared to the previous quarter.
industry is weakening
Industry, which has a comparatively high weight in Germany with about 30 percent of the gross value added, has been suffering from the weak development of the global economy for a long time. Customers tend to be reluctant to place orders, even though there was a plus in May thanks to large orders. Above all, demand from overseas is weakening, and the export-oriented German economy is feeling the effects.
Commerzbank economist Ralph Solveen recently analyzed that production is likely to be supported for a few more months by the orders that have been left behind during the corona pandemic. “In the second half of the year, however, there is a risk of a significant decline, which should make a significant contribution to the German economy shrinking overall in the second half of the year.”
Private consumption is a beacon of hope
Many people in Germany can afford less because of persistently high inflation and are putting the brakes on consumption. According to the statisticians, consumers spent less on food and beverages, clothing, shoes and home furnishings in the first quarter than at the end of the year.
Nevertheless, private consumption could become a beacon of hope over the course of the year: “Positive stimuli could come from consumption, which is benefiting from rising wages and decreasing inflationary pressure,” says KfW chief economist Fritzi Köhler-Geib. Commerzbank chief economist Jörg Krämer assumes that collective wages will probably not increase more than consumer prices again until the fourth quarter.
end of the construction boom
Investments in construction increased at the beginning of the year due to the mild weather. But the years of construction boom, which supported the German economy, is over for the time being. Significantly higher mortgage interest rates and high construction costs are dampening demand. In the first five months of 2023, incoming orders in the main construction trades fell by 14.7 percent compared to the same period of the previous year (real) after calendar and price adjustments. The number of building permits was 27 percent down on the previous year.
Increased interest rates
The high interest rates with which the central banks want to curb inflation make loans more expensive for companies and consumers. This is affecting the real estate market, among other things, and is slowing down the economy. Ascribing Germany’s weak growth solely to the European Central Bank is not enough, says the President of the Kiel Institute for the World Economy (IfW), Moritz Schularick. “This is also shown by looking at our European neighbors, all of whom are showing greater economic momentum.”
Largely robust labor market
In contrast to the years 2002 to 2006, when there were significantly more than four million unemployed and unemployment rates of up to 13 percent, the labor market has so far been largely robust. The number of unemployed rose by 11,000 to 2.555 million in June compared to May. However, the rate remained unchanged at 5.5 percent. However, according to the Ifo Institute, almost all sectors are becoming more cautious when it comes to new hires.
structural problems
For many years, the German economic model was considered successful: importing cheap (Russian) energy and intermediate goods, exporting high-quality products to the world. Russia’s war of aggression in Ukraine and its consequences show problems that were already burdening Europe’s largest economy. The German economy, with its relatively high proportion of energy-intensive industry, complains about expensive energy, unnecessary bureaucracy, high taxes and a lack of skilled workers. “Large parts of our economy lack confidence that investments will pay off in view of the high costs and sometimes even contradictory regulations in Germany,” Peter Adrian, President of the German Chamber of Industry and Commerce, recently told the German Press Agency.
International competitiveness
According to ING chief economist Carsten Brzeski, Germany’s international competitiveness had already deteriorated before the corona pandemic. “Tensions in the supply chain, the war in Ukraine and the energy crisis have exposed the structural weaknesses of the German economic model and come on top of already weak digitization, crumbling infrastructure and demographic changes.”
Christian Rusche from the institute of German industry, which is close to employers, takes a similar view: “The investment conditions in Germany have recently deteriorated again due to the high energy prices and the increasing shortage of skilled workers.” Many problems are home-made, including high corporate taxes, excessive bureaucracy and an ailing infrastructure.
