"Sick man of Europe", "dramatically bad": The German economy is not getting anywhere. The Federal Statistical Office will announce details on economic developments at the end of the year this Friday.
According to preliminary data, economic output shrank by 0.3 percent in the fourth quarter compared to the previous quarter. Nevertheless, the German leading index Dax is rushing from record to record, employment is higher than ever and Japan is losing its status as the world’s third largest economy to Germany. How does this fit together and how dire is the situation?
After a decline in economic output in 2023, the federal government only expects mini-growth of 0.2 percent in the current year. Economics Minister Robert Habeck (Greens) recently called it “dramatically bad.” “We are emerging from the crisis more slowly than hoped.”
Industry, which has a comparatively strong weight in Germany with around 30 percent of gross value added, is not only suffering from the massive rise in energy prices at times, but also from weak demand, especially from abroad. Last year, incoming orders in the manufacturing sector fell by 5.9 percent compared to the previous year. Increased interest rates and high costs are also slowing down construction. “In industry and the construction industry, the thick order cushions that companies had built up during the Corona period have now melted away,” explained Ifo economics boss Timo Wollmershäuser recently.
Headwind for the German economy
“The years in which German industry was a job and growth engine for the German economy are over for the time being,” expects Sebastian Dullien, scientific director of the Institute for Macroeconomics and Economic Research (IMK) of the Hans Böckler Foundation. In particular, the energy price shock following Russia’s war of aggression on Ukraine and the associated ongoing uncertainty in energy prices continued to have an impact.
In addition, the weakness of world trade is affecting the export-oriented German economy: the value of exports of goods "Made in Germany" fell last year. “In addition to high energy costs, the headwind for the German economy comes primarily from weak global demand, especially for highly cyclical goods such as cars, machine tools and chemicals,” analyzed economists at credit insurer Allianz Trade Deutschland.
Number of employed people at their highest level since 1990
Nevertheless, the labor market in Europe’s largest economy has so far been robust, also due to the shortage of skilled workers. Many companies are still desperately looking for staff. The Deutsche Bundesbank currently sees no signs “that the situation on the labor market will deteriorate noticeably as a result of the weak economy”.
According to preliminary data from the Federal Statistical Office, the number of people in employment reached 45.9 million last year, the highest annual average since reunification in 1990. Nine out of ten of the additional jobs were created in the service sector (+0.9 percent), while the number was in the manufacturing sector There were smaller increases in trade (+0.3 percent) and construction (+0.6 percent).
Glimmer of hope for private consumption
The robust labor market and the trend towards falling inflation could help boost private consumption this year as an important economic support for Germany. “Positive news for the economy is currently difficult to penetrate, but it does exist: one such silver lining is the foreseeable recovery in private purchasing power,” said KfW chief economist Fritzi Köhler-Geib recently. Last year, many people saved on consumption because of the still high inflation.
Regardless of slashed economic forecasts that see Germany as the bottom performer in the euro area this year, the Dax is rushing from record to record. However, the leading index only reflects a part of the German economy, which is primarily characterized by medium-sized companies.
Structural problems
While countries like the Netherlands and Sweden will have to be content with similarly meager growth as Germany this year, according to EU forecasts, Greece and Spain are expected to achieve significantly more. According to economists, these countries will benefit primarily from the tourism boom after the end of the corona pandemic.
“So what otherwise helps us – a large industrial sector that benefits when the global economy is booming and energy prices are low – is now causing us problems,” said Ifo President Clemens Fuest "Tagesschau24". However, Germany also has structural problems. “The auto industry is in a process of change. We are experiencing demographic change. We are heading towards a situation with a shrinking workforce. And that worries many investors.”
Reliable framework conditions required
Business associations also criticize over-regulation, dilapidated infrastructure, taxes that are too high compared to international standards and political uncertainty in view of the disputes within the traffic light coalition. “Companies urgently need reliable and better framework conditions. This affects the energy supply as well as securing skilled workers and the infrastructure,” warned DIHK economic expert Jupp Zenzen recently. Employer President Rainer Dulger warned at the turn of the year: “Out of disappointment and, above all, because of the economic disadvantages in Germany as a business location, more and more investment decisions are now being made in favor of foreign countries.” (dpa)