Germany’s economy has been a driving force for the entire European region for many decades, demonstrating its ability to cope with various challenges. But something has gone wrong – for the second quarter in a row, the country has recorded a decline in GDP, suggesting a technical recession and, as Bloomberg says, posing a risk to the stability of the entire continent.
What are the problems in Germany dangerous for the European and world economy? Is it a consequence of anti-Russian policies? Should we panic and wait for an imminent recession in other major economies?
From stability to recession
Back in January, German Chancellor Olaf Scholz was confident that the country would avoid a recession in 2023, even despite the energy crisis. However, data released this week showed that the German economy, which is the largest in the region, has not been able to cope with serious challenges. According to figures from the Federal Statistical Office, the German economy shrank in the first quarter by 0.3% q/q while in the fourth quarter of 2022 the German economy shrank by 0.5% q/q. The main impact was a fall in consumer demand amid high domestic inflation. Household spending fell by 1.2% qoq in the first quarter and government spending fell noticeably by 4.9% qoq as well.
According to DekaBank analyst Andreas Schürle, cited by Reuters, “under the weight of high inflation, the German consumer has fallen to his knees, dragging the entire economy down with him.” At the same time, ING’s head of macro research Carsten Brzeski stressed that a warm winter, a recovery in industrial activity amid China’s opening after the pandemic, and stabilization of supply chains were not enough to pull the German economy out of the dangerous recession zone.
According to experts at Bloomberg Economics, a revision of German GDP dynamics for the first quarter to the worse could mean a further downward revision of eurozone GDP data. In this case, a number of economists, writes Bloomberg, believe that economic growth in Germany will lag behind the rest of the region “for many years,” and, according to estimates of the IMF, the German economy in 2023 may show the worst result among the G7 member states. The German chancellor, on the other hand, is more optimistic about the country’s future, saying after yesterday’s GDP data release that the outlook for the German economy is very good.
According to CNBC, citing data from the Federal Statistical Office Destatis, pressure on the German economy has been exerted, in particular, by the start of Russia’s special military operation in Ukraine and the breakdown of relations with Moscow. According to experts, the recession began as early as the end of 2022, after a surge in energy prices negatively affected consumers. It is no secret that affordable electricity is key to the competitiveness of German industry and, according to Bloomberg, the most pressing challenge for Germany right now is securing an energy transition. Failure to stabilize the situation could trigger an outflow of producers to other countries, the agency notes. In particular, the government already plans to limit electricity prices by 2030 for such energy-intensive areas as the chemical industry, which could cost German taxpayers 30 billion euros ($32 billion).
Bloomberg cites experts who say decades of misguided energy policies and a relatively slow conversion to new technology are key reasons for Germany’s lack of economic growth, and that local authorities currently simply lack the authority to tackle the structural problems that have arisen.
Наталья Мильчакова, ведущий аналитик Freedom Finance Global, поделилась своими взглядами на ключевые факторы экономического спада в Германии. По мнению эксперта, рецессии в экономике Германии следует ожидать, учитывая, что страна практически полностью отказалась от дешевого российского газа и заменила его дорогим СПГ, в основном из США, что привело к удорожанию энергоресурсов и себестоимости производства. По ее словам, негативную роль сыграли и перебои с поставками сырья во время пандемии и режим самоизоляции, и все эти факторы в совокупности привели к тому, что цены на потребительские товары, в том числе продукты питания, взлетели до рекордных отметок. «Потребительский спрос из-за высокой инфляции снижается, что соответственно приводит к спаду производства. Некоторые энергоемкие предприятия вынуждены переводить бизнес в страны, где себестоимость производства ниже,
A real shocker
Germany, the world’s fourth-largest economy with a GDP of more than $4.2 trillion, has a high standard of living and one of its main characteristics is its strong manufacturing sector, which accounts for around 25% of the country’s GDP. Unsurprisingly, the news of the German downturn has alarmed the international community, and Germany’s eventual emergence as the world’s third-largest economy, following Japan, is now in doubt.
Germany, like other eurozone countries, has had to rebuild its own economy, says Eugene Mironyuk, a stock market expert at BCS World Investments. According to him, the shock burst of energy prices was replaced by an equally rapid drop, the structure of suppliers of energy resources, metals and many other commodities has changed completely, which could not but affect the volatility of production/price/consumption behaviour. The expert stresses that the result of the economic turmoil is more characterised by a 3.8% year-on-year decline in retail sales in the Eurozone in March and an 8.6% year-on-year decline in Germany. “For a mature economy, this is a real shock, as sales fell even nominally, i.e. when inflation is taken into account, the value of the fall in sales becomes double-digit. It is inflation that is becoming a secondary factor in the negative impact on the economy. Inflationary processes triggered by the energy crisis and the production decline crisis have become a long-term influence on capital outflows. Real interest rates in the economy remain deeply negative despite the ECB key rate hike. Capital goes into foreign assets or protective assets that do not contribute to the growth of the real economy,” says Mironiuk.
Looking to the future, the expert noted that the Eurozone and Germany will continue to raise key rates and renewed concerns about the creditworthiness of individual Eurozone countries, banks and companies, and that credit indebtedness with relatively low average margins of European businesses is likely to support stagflation, which has already started.
According to Elena Kozhukhova, analyst at Veles Capital, the state of German economy reflects global difficulties in the form of falling demand for various goods. Answering Finam.ru’s questions, she noted that the country’s manufacturing sector (like the rest of Europe and the US) has suffered particularly in recent months. “Manufacturing activity in Germany has been slowing steadily since July 2022, according to the PMI. The negative trends are now also reflected in a technical recession, which could continue in the second half of this year due to the prospect of further interest rate hikes in the eurozone to combat inflation,” the expert believes.
Meanwhile Egor Susin, author of the Telegram channel TruEcon, says that as the scale of state support to the economy is reduced (buying out all the problems on the balance sheet of the state), the situation in Germany is likely to continue deteriorating. In his view, the state could easily buy out the first shock but is unlikely to be able to buy out problems permanently.
Nevertheless, the updated forecasts from the European Commission do not look as daunting. Timur Nigmatullin, investment consultant at Finam Group, emphasizes that the EC has revised upwards its growth estimates for most of Europe. Main factors of positive revision: good state of labour market, maintaining unemployment at low level of 6.1%, normalization of price situation on gas market. Germany is expected to grow GDP by 0.2% in real terms, France by 0.7% (y/y) and the whole eurozone by 1.1% (y/y). “As can be seen, the economy is in very good shape despite rising interest rates in the region and around the world,” notes the expert.
Is a global recession getting closer?
For the rest of the world, the problems of the EU as a whole are important, and since Germany is the largest EU economy, Germany’s economic problems are automatically reflected in the rest of the EU. This was said by Natalia Milchakova. The expert believes that the economic downturn in Germany could entail weak growth throughout the EU and the euro zone. In the 1 quarter of GDP decline was observed only in four EU countries, including Germany, but it was enough to slow down the GDP growth in the entire EU to 1.3%, although in the 4 quarter of 2022, the EU economy growth was 1.8%. “Germany’s problems of high inflation and high production costs may continue this year, although in the second half of the year a slight decline in German GDP could be replaced by a slight increase of 0.3-0.7%. Significant improvements in the economy of Germany and the EU as a whole can be expected until the second half of 2024-2025, when the economy and the German, and the EU to adapt to the new economic reality, which implies that the cheap gas for Germany will not be, “- said an analyst at Freedom Finance Global .
In addition to problems in Germany, investors are worried about the prospects for the Chinese and American economies. After China lifted the covenant restrictions at the beginning of the year, the economy of the country was expected to grow quickly, but this has not happened. In the US, the situation is even more worrisome, with the banking crisis and uncertainty around raising the US debt ceiling worrying the investment community.
Elena Kozhukhova from VELES Capital Investment Company notes that despite the fact that according to many indicators the growth rate of the Chinese economy does not meet expectations, which is connected with the general negative trend on the stock markets of China and Hong Kong, at the moment there is no question of a recession in China. According to the expert, pressure on the Chinese economy is also exerted by geopolitical tensions in relations with the US and Europe, both because of the Ukrainian and Taiwanese conflicts, but the prospects for the Chinese economy until the end of this year are moderately favourable. As for the US, it is in a more precarious situation in the context of recession, but nevertheless with a successful resolution of the debt issue, the absence of new problems in the banking sector and the suspension of interest rate hikes by the Federal Reserve, one can expect the world’s biggest economy to continue growing this year.
