Financial Times: From Europe’s powerhouse to its weak link: Germany’s economy stutters

Christian Lindner, Germany’s finance minister, didn’t pull his punches in describing the grim new actuality dealing with Europe’s largest economic system.

The nation’s prospects had changed into “fragile”, he mentioned on Wednesday. Growth forecasts have been being downgraded. Life had changed into “much more expensive for lots of people”, with rising costs for gasoline, power and meals, Financial Times reported on August 11. 

Germany is experiencing a squall of shocks which are darkening its financial outlook. Along with hovering inflation, persistent provide chain issues and weaker world demand are weighing closely on its industrial sector.

“What’s most worrying is just how broad-based the weakness in the economy is,” mentioned Clemens Fuest, head of the Ifo Institute, a think tank. In earlier downturns, providers suffered however trade recovered, and vice versa. “But now we’re seeing weakness across the board.”

The eurozone’s powerhouse has changed into its weak hyperlink. Germany’s economic system stagnated between the primary and second quarters, whereas the one foreign money space as an entire grew by 0.7 per cent. Last month the IMF slashed its forecast for German development in 2023 by 1.9 share factors to 0.8 per cent, the most important downgrade of any nation.

While Italy, Spain and France recorded stronger than anticipated development on the again of tourism-fuelled growth, Germany has needed to rely extra on home demand. But with shoppers labouring underneath excessive inflation, spending and confidence are fragile. Retail gross sales fell 8.8 per cent in contrast with a yr beforehand — the most important decline on file.

“People are feeling really insecure,” mentioned Monika Schnitzer, an economics professor at Munich’s Ludwig Maximilian University and a member of the panel of economists advising the German authorities. “They’ve been told to keep money back for higher energy bills and that has led to a drop in consumption.”

The nation’s economic system is now so weak that many worry a technical recession — outlined as two consecutive quarters of detrimental development.

Pessimists level to a drop in water ranges on the Rhine, which is affecting river visitors in one in every of Germany’s most closely industrialised areas, the latest rise in tensions between Beijing and Taiwan, and the prospect of a worldwide downturn — all the time an issue for export-oriented economies equivalent to Germany’s.

The BDI, Germany’s principal enterprise foyer, mentioned late final month {that a} recession was turning into an increasing number of doubtless. Ordinary folks in addition to corporations have been affected by greater power costs that have been stoking inflation, whereas China’s zero-Covid technique was “paralysing global trade”.

Schnitzer mentioned a lot hinged on whether or not Russia turned off the gasoline faucet utterly and whether or not Beijing shuttered ports and factories ought to Covid-19 case numbers rise.

“If we can muddle through and things don’t get worse in the US and China, we may be able to avoid a recession, but even then we can’t expect a significant upswing,” she mentioned. “Either way, the uncertainty is just huge at the moment.”

Recent information has offered ammunition for these predicting a downturn. Last month Ifo’s carefully watched index of enterprise confidence fell to its lowest degree in additional than two years.

Though industrial manufacturing noticed a modest improvement in June, orders fell 0.4 per cent — the fifth month-to-month decline in succession — and at the moment are 9 per cent beneath their degree a yr in the past.

The problem of the approaching months will probably be for companies to steer a course between the Scylla of continuous issues with providing chains and the Charybdis of rising gasoline costs. “They expect no relief on either,” mentioned Fuest of Ifo.

About 73.3 per cent of corporations surveyed by Ifo in July mentioned they have been experiencing shortages, with about 90 per cent of corporations within the electronics, machine-building and auto sectors struggling to obtain all of the supplies and intermediate merchandise they wanted.

An even larger drawback is the rise in power costs. Hans Jürgen Kerkhoff, president of the German Steel Federation, mentioned the metal trade was incurring further prices of about €7bn a yr, in contrast with 2021, as gasoline and electrical energy payments rose. Government plans to impose a levy on gasoline shoppers to assist struggling gasoline provide corporations “would add another billion”, the group mentioned.

For different corporations, it’s the instability that’s most troubling. Claus Bauer, chief monetary officer at auto components provider Schaeffler, mentioned: “We’re talking about tripling [of energy prices] one day, then going down by 30 per cent the next day.” He added that his firm had locked in contracts till the top of the yr.

Some corporations are extra upbeat. One is Bonn-based Deutsche Post DHL, one of many world’s largest logistics teams by income, which has been posting file income up to now yr.

“The current predictions from some economists are, from my perspective, too pessimistic,” mentioned chief govt Frank Appel. “In our numbers, we don’t see any recession yet.”

Weaker world demand has pushed down oil costs, which Appel mentioned would imply decreased inflation. “Also, rates are coming down in air freight and ocean freight,” he mentioned. “These are healthy trends.”

There are different glimmers of hope. “The fact that companies have such a big backlog of orders . . . speaks against a recession,” mentioned Nils Jannsen of the Kiel Institute for the World Economy. That ought to enable them to ramp up manufacturing even when orders stagnate or are cancelled, he added.