From Europe’s powerhouse to its weakest link: Germany’s economy falters

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Christian Lindner, Germany’s finance minister, did not fare well when describing the grim new reality facing Europe’s largest economy.

The country’s outlook had become “fragile”, he said on Wednesday. Growth forecasts were revised downwards. Life had become “much more expensive for many people”, with rising gas, energy and food prices.

Germany is experiencing a flurry of shocks that are clouding its economic outlook. Along with soaring inflation, ongoing supply chain issues and weaker global demand are weighing heavily on its industrial sector.

“What is most worrying is how widespread the weakness in the economy is,” said Clemens Fuest, director of the Ifo Institute, a think tank. In previous recessions, services suffered, but manufacturing recovered, and vice versa. “But now we see weakness across the board.”

The Eurozone powerhouse has become its weak link. The German economy stagnated between the first and second quarters, while the single currency area as a whole grew by 0.7%. Last month, the IMF lowered its forecast for German growth in 2023 by 1.9 percentage points to 0.8%, the biggest downgrade of any country.

While Italy, Spain and France recorded stronger-than-expected growth thanks to a boom fueled by tourism, Germany had to rely more on domestic demand. But with consumers struggling with high inflation, spending and confidence are fragile. Retail sales fell 8.8% from a year earlier, the steepest decline on record.

Falling water levels on the Rhine affect river traffic in one of Germany’s most industrialized areas © Sascha Steinbach/EPA-EFE/Shutterstock

“People really don’t feel safe,” said Monika Schnitzer, an economics professor at the Ludwig Maximilian University in Munich and a member of the panel of economists advising the German government. “They were told to save money for higher energy bills and that led to lower consumption.”

The country’s economy is now so weak that many fear a technical recession – defined as two consecutive quarters of negative growth.

Pessimists point to falling water levels on the Rhine, which is affecting river traffic in one of Germany’s most industrialized areas, the recent rise in tensions between Beijing and Taiwan, and the prospect of a global slowdown – still a problem for export-oriented economies like Germany’s.

The BDI, Germany’s main business lobby, said late last month that a recession was becoming increasingly likely. Ordinary citizens as well as businesses suffered as rising energy prices fueled inflation, while China’s zero Covid strategy “crippled global trade”.

Schnitzer said a lot hinged on whether Russia completely turned off the gas tap and whether Beijing closed ports and factories if the number of Covid-19 cases increased.

“If we can manage and things don’t get worse in the US and China, we might be able to avoid a recession, but even then we can’t expect a meaningful recovery,” he said. she declared. “Anyway, the uncertainty is just huge at the moment.”

Recent data has provided arguments for those predicting a slowdown. Last month, the closely watched Ifo index of business confidence fell to its lowest level in more than two years.

Although industrial production rose slightly in June, orders fell 0.4% – the fifth consecutive monthly decline – and are now 9% below their level of a year ago.

The challenge for the coming months will be for companies to navigate between the Scylla of continuing problems with supply chains and the Charybdis of rising gas prices. “They don’t expect any relief for either,” Fuest d’Ifo said.

About 73.3% of companies surveyed by Ifo in July said they were experiencing shortages, with around 90% of companies in the electronics, mechanical engineering and automotive sectors struggling to source all materials and intermediate products they needed.

An even bigger problem is rising energy prices. Hans Jürgen Kerkhoff, president of the German Steel Federation, said the steel industry was incurring additional costs of around 7 billion euros per year, compared to 2021, due to the increase in bills for gas and electricity. The government plans to impose a tax on gas consumers to help struggling gas supply companies “would add another billion”, the group said.

For other companies, it is the instability that is most troubling. Claus Bauer, chief financial officer of auto parts supplier Schaeffler, said: “We are talking about tripling [of energy prices] one day, then down 30% the next day. He added that his company had blocked contracts until the end of the year.

Some companies are more optimistic. One is Bonn-based Deutsche Post DHL, one of the world‘s largest logistics groups by revenue, which posted record profits last year.

“The current predictions of some economists are, in my view, overly pessimistic,” chief executive Frank Appel said. “In our numbers, we don’t see a recession yet.”

Falling global demand has driven down oil prices, which Appel said would mean lower inflation. “In addition, rates are falling in air freight and ocean freight,” he said. “These are healthy trends.”

There are other glimmers of hope. “The fact that companies have such a big order book . . . speaks against a recession,” said Nils Jannsen of the Kiel Institute for the World Economy. orders are stagnating or being cancelled, he added.

The German government is not too alarmed by the pessimistic statistics. “A lot of companies tell us that even if they don’t get new orders, they will still be busy for the next two years,” an official said.

A recession is always a possibility, he said, but it could “be mild – where growth is below zero for two quarters, but all is well, businesses can pay their bills and we can help everyone during the winter”.

However, the outlook is so ominous that the government is preparing to adopt its third set of relief measures for the population since the outbreak of war in Ukraine. Lindner said on Wednesday he wanted to raise income tax thresholds as well as child allowances and the tax-free allowance. “We are in a situation where we have to act,” he said.

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