Germany slips into recession, everyone should be worried

According to an article by Politico, Germany is the eurozone’s biggest ― but now risks pushing everyone else down. Caliber.Az reprints this article.

Not so long ago, Germany was Europe's powerhouse: wealthy, booming, politically strong. But the mighty have fallen.

And it's not hard to see why this is giving the rest of the eurozone a bad case of the jitters. After all, if its largest member is struggling, it risks dragging the whole lot of them down with it.

Germany is by far the eurozone's biggest economy, accounting for almost 30 per cent of the bloc's economic output. It is the largest trading partner of more than half of the EU's 27 countries. Politically too, that has enabled Berlin to call a lot of the shots within the European Union.

But Thursday's data, which showed that Germany has fallen into recession, didn't come out of the blue. It was already among the last in Europe to return to pre-COVID levels when economies started to rebound after the pandemic. And it's that very drawn-out nature of Germany's malaise — as well as an absence of the surefootedness of the past from the government in Berlin — that's convincing experts this isn't a blip.

"A fundamental improvement is not in sight,” Commerzbank economist Jörg Krämer said. All important leading indicators in the manufacturing sector were now falling, he added.

The latest first-quarter growth estimate showed the German economy contracting by 0.3 per cent. That followed a shrinking of 0.5 per cent in the final quarter of 2022. The latest figures for the eurozone as a whole show the currency bloc marginally growing, by 0.1 per cent.

We will work it out

Analysts put the latest contraction down to a combination of high energy prices triggered by Russia's war in Ukraine and apparent structural weaknesses in the country's economic foundations, which the post-Angela Merkel coalition government has struggled to fix.

Germany was known as the sick man of Europe in the late 1990s and early 2000s as it battled with the cost of reunification following the fall of the Berlin Wall. But it bounced back strongly and by the time other eurozone nations such as Greece, Italy and Portugal were confronting huge debt and worries about the very existence of the euro currency at the start of the last decade, Germany could dictate conditions of their rescue from a position of strength — and use its own economic success to pull the bloc up by its bootstraps.

But times have changed, even if Olaf Scholz, who's been the German chancellor since December 2021, has tried to put a brave face on things. Economic prospects were "very good," he told a press conference on Thursday. "We will work out the challenges we face," he said.

But there is no doubt that economic woes will only accentuate tension among the three partners in the governing coalition in Berlin, which are already squabbling over the budget and climate policies.

This, in turn, risks diverting efforts from an effective policy response: Only half of Germans believe the ruling government coalition will hold until the end of its legislative period in the fall of 2025, a survey by Forsa pollster published by ntv/RTL broadcasters showed on May 25.

Sense of reality

 "The optimism at the start of the year seems to have given way to more of a sense of reality," ING Bank economist Carsten Brzeski said, pointing to declining purchasing power, thinned-out industrial order books, as well as expected drags of tighter monetary and weaker US growth.

“On top of these cyclical factors, the ongoing war in Ukraine, demographic change and the current energy transition will structurally weigh on the German economy in the coming years.”

While a mild winter meant that Germany, which was heavily reliant on Russian energy imports, managed to escape the worst-case scenarios of gas shortages that would have forced complete factory shutdowns, prospects don't look good.

Even ahead of the downward revision, Germany was expected to prove a drag on the region’s overall economic prospects. The European Commission’s spring economic forecasts put German growth at 0.2 per cent this year and 1.4 per cent next year, compared with a eurozone average of 1.1 per cent and 1.6 per cent, respectively.