Relief has replaced depression as the most important sentiment towards Germany among economists. Experts warn that Europe’s largest economy is headed for another downturn, even as it emerges from last winter’s energy crisis better than initially feared.
Long-standing structural problems, from an aging population to a crumbling infrastructure, have been exacerbated by the Ukraine war, rising interest rates and sluggish global trade.
Both the IMF and OECD expect Germany to be the world’s worst-performing major economy this year. “Please help us, our economy is collapsing,” the country’s best-selling tabloid Bild Zeitung recently sounded the alarm, appealing to Prime Minister Olaf Scholz to take action.
Why is Germany doing so poorly?
The world’s fourth-largest economy stagnated in the three months to June after contracting in the previous two quarters, underperforming all of its major rivals.
A big reason is the global recession in the manufacturing industry. Germany, where the sector accounts for one-fifth of total output, has been disproportionately hit. This is the same level as Japan, but almost double that of the United States, France and the United Kingdom.
Oliver Holtemeler, director of macroeconomics at the Halle Institute for Economic Research, said high energy prices and trade tensions caused by Russia’s all-out aggression had a serious impact on the sector. Rising capital costs and a shortage of skilled labor are also “under serious pressure,” he added.
German gas and electricity prices have fallen since last year. But it remains higher than in many countries outside Europe, with production in Germany’s energy-intensive sectors such as chemicals, glass and paper down 17% since the beginning of last year, suggesting permanent losses.
“The outlook for German industry is bleak,” said Franziska Palmas, senior economist at consultancy Capital Economics.
The country’s traditional strengths in car manufacturing are under threat as major brands lose market share to cheaper Chinese rivals in the burgeoning electric vehicle sector, adding to the country’s concerns. “Automobiles, the country’s main export, are becoming increasingly competitive,” said Martin Wahlberg, senior economist at Generali Investments Europe.
Analysts polled by Consensus Economics this month expect Germany’s gross domestic product (GDP) to contract by 0.35% this year, reversing the modest growth forecast three months ago. It also lowered its growth forecast for 2024 to 0.86% from 1.4% at the beginning of the year.
How long have you been underperforming?
Germany recovered faster from the 2008 financial crisis than the rest of the eurozone, as global trade grew and southern eurozone countries faced banking and sovereign debt crises.
But then the leader started to lag behind. Germany’s GDP was just above its pre-pandemic level in June, while the eurozone was 2.6% above that level.
![Line chart of Gross Domestic Product (percentage change) showing Germany's economy lagging behind the rest of the Eurozone and the US](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2Fca04ec10-3db1-11ee-968d-b544f12c827a-standard.png?dpr=1&fit=scale-down&quality=highest&source=next&width=700)
“Except for the coronavirus crisis, the decline in performance began in 2017, and structural problems have been around for some time,” said Jörg Kraemer, chief economist at Commerzbank. Ta.
Rising labor costs, high taxes, an oppressive bureaucracy and a lack of digitalization of public services are steadily undermining the country’s competitiveness, experts say. This is underscored by Germany’s drop from the top 10 ten years ago to 22nd out of 64 major countries in the IMD Business School’s competitiveness rankings.
“Germany built up in the first decade of the euro because unit labor costs in Germany rose faster than in the rest of the eurozone, and labor costs in Germany’s Eastern European supply chains converged with those in Western Europe,” said Christian Schultz. We’ve lost a lot of advantage,” he said. , Deputy Chief European Economist at US Bank Citi.
The ZEW Institute recently dubbed Germany a “high-tax country for investment,” noting that its effective tax rate of 28.8% on corporate profits is well above last year’s EU average of 18.8%.
What is the government doing about it?
When Chancellor Scholz was asked about this in a ZDF television interview earlier this month, he said the government would take a number of “specific and urgent steps” to accelerate the switch to renewable energy and increase the supply of labor. said it was setting an “incredible pace” with the project.
He also praised the plans of semiconductor makers Intel and Taiwan Semiconductor Manufacturing Company to build sprawling factories in Germany, but those factories were only secured thanks to subsidies worth around 15 billion euros. .
Most economists believe Berlin is headed in the right direction by tackling structural problems rather than short-term fiscal stimulus.
“The government is already addressing some important issues,” said Holger Schmieding, chief economist at German bank Berenberg. He said legislation was planned to bring them in.
But Scholz’s tripartite coalition has also been hampered by infighting, and recently Green family ministers this month announced a liberal coalition aimed at boosting growth by giving businesses billions of euros in tax cuts a year. It vetoed the proposal of Finance Minister Christian Lindner. .
Any chance of a rebound?
Some economists believe that Germany’s poor performance will not last long despite these dark conditions, and that cyclical difficulties will ease as energy prices ease and exports to China recover. bet on
“I think the pessimism is overdone,” said Florian Hense, a senior economist at German fund manager Union Investment, who expects growth to return to the euro zone average of 1.5% by 2025. did.
Inflation is expected to halve to 3% next year, while a more than 5% rise in wages in Germany could revive consumer spending. “Real wage growth is one of the main reasons why we think the recession will be shallow,” said Commerzbank’s Kramer.
Some believe the current economic crisis will force governments to grapple with difficult labor market and supply-side reforms, potentially ushering in a new era of outperformance similar to the 1990s. “The bigger the problem, the more likely it is that policy will actually change,” said Stephan Kues, director of the Kiel Institute for World Economics.
Some people are more pessimistic. “The country needs a comprehensive reform and investment plan,” said Carsten Brzeski, global head of macro at Dutch bank ING. “But we are far from understanding it.”
Additional reporting by Valentina Romay in London and Laura Pitel in Berlin