Germany’s inability to generate meaningful growth casts a shadow over the long-term outlook for the economy, as well as political hopes for the three ruling parties under Chancellor Olaf Scholz.
With business confidence last week plummeting and data on Tuesday showing gross domestic product barely rose in the second quarter, a country long seen as the engine of European expansion looks increasingly in limbo.
And as Bloomberg points out, of the 10 quarterly GDP announcements since Scholtz took over, more than half have recorded either near-stagnation or contraction.
Import Export
At the heart of weakness in Germany is the manufacturing base that sustained export-led growth for much of this century.
The momentum had started to fade even before the Covid-19 pandemic, as the first presidency of Donald Trump and trade disputes with China worsened the global trading environment in which German exporters had thrived. The end of cheap natural gas imports from Russia was also a blow that companies are still struggling to overcome, especially in energy-intensive industries.
“There’s still this hope that one day, the globalized world that we’ve benefited so much from will return,” Sandra Ebner, senior economist at Union Investment, tells Bloomberg. “That’s not going to happen – and we’re having a hard time getting used to it.”
The automotive industry in Germany
German automakers, a mainstay of the economy’s past success, are also scrambling to make up lost ground as they face China’s lead in electric vehicle production and their domestic market.
“Only 12% of newly registered vehicles in Germany are electric — last year it was more than 20%,” says Helena Wisbert, professor of automotive economics at Ostfalia University.
The latest financial results of the country’s heavyweight industries paint a similar picture. BASF’s earnings fell after prices fell across its chemicals business and Mercedes-Benz Group cut its core margin forecast on a subdued outlook and strong competition in China. Volkswagen – which has already been forced to cut its outlook – will report earnings on Thursday.
The roots of the economic crisis go beyond cyclical volatility – half of the estimated 7% shortfall in industrial activity is structural, according to Bloomberg Economics research.
Despite these problems, some observers were quick to declare that the worst would be over by now. Last October, Berenberg economist Holger Schmieding said the German industrial recession may be nearing its nadir. But as the second quarter dawned, the industry was still languishing.
In April, the Ifo institute said the economy was stabilizing, but a global economic pickup was somehow not helping German manufacturers. In fact, output was falling again then and sank further in May to hit a four-year low, and Ifo chief Clemens Fuest last week told Bloomberg Television that the overall outlook for Germany is “rather bleak.” .
Technological impasse
“I blame the technological deadlock,” says Martin Gornig, an economist at the German Institute for Economic Research. “We can no longer invest in old fossil fuel technology and we don’t yet know what new technology to invest in. If we manage to overcome this, Germany will certainly be able to become the leader of Europe again.”
Easing non-energy inflation and continued wage growth may provide some support for the climate, as can the 2025 budget plan that the reluctant Soltz government managed to agree to last month after hard-fought negotiations.
However, none of this appears to be feeding the consumer yet, with Thursday’s Ifo business sentiment index showing a decline in services. Germany’s sluggish economic recovery is an ominous sign for the embattled chancellor, who confirmed last week that he plans to run for a second term next year.
Earlier this month, the government approved a development plan designed to get the country back on track. The package includes steps to boost private and public investment and accelerate the expansion of renewable energy, additional tax cuts for companies and incentives for people to work more. The government will also extend tax breaks on electricity costs for manufacturers and step up efforts to cut red tape.
But voters are unlikely to feel the effects before a general election in September 2025. And with the chancellor’s Social Democrats slipping in the polls, Germany’s economic malaise looks likely to become part of his legacy.
It also fuels support for extremists in Germany’s less developed eastern states. Three state elections will be held in the east this September, and the far-right AfD and the far-left BSW are set to make gains with anti-immigration and pro-Russian platforms.
Source: ot.gr
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