Keystone-SDA
(Keystone-ATS) Is Germany once again the “sick man” of Europe? The activity of the continent’s largest economy unexpectedly declined in the second quarter, leaving it at the bottom among eurozone economies.
The 0.1% decrease in gross domestic product, announced on Tuesday by the National Statistics Office, halts the slight recovery that began at the start of the year, following a 0.2% increase in the first quarter after a decline of 0.3% throughout 2023.
The spring figures came as a surprise: analysts at the financial platform Factset had anticipated growth of 0.1%. Year-over-year, the activity also fell by 0.1%.
Germany’s economy is lagging behind its neighbors. The GDPs of France, Spain, and Italy, also reported on Tuesday, grew by 0.3%, 0.8%, and 0.2% respectively.
“Stuck”
“Production is stagnant, capacity utilization is decreasing, exports are weakening, and new industrial orders are low,” summarized the DIHK chambers of commerce organization on Tuesday.
For two years, Germany has faced challenges in its export sector, which is critical to its economic model, suffering from high energy prices, increasing borrowing costs, weak domestic demand, and, most notably, difficulties in international trade.
Due to these challenges, the country has slowly lost its role as the engine of the Eurozone, to the point where the term “sick man of Europe,” which was popularized at the end of the 1990s following the economic consequences of reunification, has resurfaced.
While the German economy has benefited from a sharp decline in inflation since the beginning of the year, which led to an initial decrease in ECB rates, a rise in consumption, and much lower energy costs, this has not been enough to sustain a recovery, especially with slowing growth in China, a crucial market for its industries.
Industrial production and exports unexpectedly dropped in May, by 2.5% and 3.6% respectively over the month.
To compound the situation, worsening structural issues, including a labor shortage, increasing production costs, and bureaucratic burdens, continue to undermine competitiveness.
This bleak outlook is likely to exacerbate existing divisions among the parties in the ruling coalition, which includes the Greens, Liberals, and Social Democrats.
These three parties are already facing internal discord, with some advocating for increased spending to boost activity and others favoring budgetary restraint, within a government that holds little popularity among the public.
Budget Constraints
The outlook for the remaining year appears grim. “The German economy is entrenched in crisis,” said Klaus Wohlrabe, an expert at the Ifo economic institute, on Tuesday.
The government is predicting only a slight growth of 0.3%, significantly below the expected 0.8% growth for the eurozone as a whole, as estimated by the European Commission.
The only flicker of hope lies in the “dynamics of services” and the “rebound of the construction sector,” while demand for mortgage loans is expected to rise due to falling ECB rates, stated Fritzi Köhler-Geib, chief economist at the public bank KfW.
In an effort to combat the crisis, Berlin introduced an economic support plan in early July that includes nearly 50 measures, such as tax reductions and bureaucratic simplifications for households and businesses. The to achieve “an additional half percentage point of growth.”
This is merely a drop in the bucket, considering the significant investment needed to modernize infrastructure and adapt to ecological and digital transitions.
The IW Economic Institute estimates the investment needs over the next decade at 600 billion euros.
However, a ruling by the Constitutional Court in November limited the opportunities for public borrowing due to national budgetary discipline rules that the left aims to reform.
Yet, the Liberal Finance Minister, Christian Lindner, remains firmly opposed to this.
Keystone-SDA
Germany: The Sick Man of Europe Again?
(Keystone-ATS) Is Germany once again the “sick man” of Europe? The activity of the continent’s largest economy unexpectedly declined in the second quarter, leaving it the eurozone’s bottom economy.
Economic Overview
The 0.1% decline in gross domestic product (GDP), announced on Tuesday by the National Statistics Office, puts a stop to the slight recovery that began at the start of the year, marked by a 0.2% increase in the first quarter after a 0.3% fall over the whole of 2023.
The spring figures are surprising; analysts at the financial platform Factset were expecting a growth of 0.1%. Over the year, Germany’s economic activity also fell by 0.1%. In comparison, the GDPs of neighboring countries like France, Spain, and Italy recorded increases of 0.3%, 0.8%, and 0.2% respectively.
Current Challenges Facing Germany
Germany’s economic struggles can be summarized in a few key areas:
- Declining production and capacity utilization.
- Weakening exports.
- Low new orders in various industries.
The DIHK chambers of commerce organization expressed these issues clearly, stating, “Production is not starting, capacity utilisation is falling, exports are weakening and new orders in the industry are low.”
For the last two years, Germany has grappled with challenges in its vital export industry, burdened by:
- High energy costs.
- Rising credit costs.
- Weak domestic demand.
- Difficulties in international trade.
The Return of the “Sick Man of Europe”
The phrase “sick man of Europe,” once used in the late 1990s following the economic fallout from Germany’s reunification, seems to be re-emerging. The country has gradually relinquished its role as the Eurozone’s economic locomotive, presenting a stark contrast to its neighbors.
Inflation and Economic Recovery
Germany’s economy appeared to benefit from a significant slowdown in inflation since the start of the year, which led to a reduction in European Central Bank (ECB) rates, boosting consumption and lowering energy costs. However, these positive shifts have not been sufficient to sustain the anticipated recovery amid:
- Slowdown in growth in China, a crucial market for German exports.
- Unexpected drops in industrial production and exports by 2.5% and 3.6% respectively in May.
Structural Issues Affecting Competitiveness
Germany’s economic scenario is further complicated by persistent structural issues:
- Labor shortages.
- Rising production costs.
- Complex bureaucracy limiting business agility.
These factors combine to undermine Germany’s competitive edge in the global market, presenting challenges for the ruling coalition government, which comprises the Greens, Liberals, and Social Democrats.
Political Implications and Budget Constraints
Amidst the economic gloom, divisions among the ruling coalition parties deepen. The government is highly unpopular, with differing opinions on how best to stimulate economic activity. While some advocate for spending to boost activity, others emphasize the need for fiscal discipline focusing on budgetary rigour.
Economic Forecasts
The outlook for Germany’s economy remains bleak:
- Experts predict only a slight growth of 0.3% for the year, significantly below the Eurozone’s projected growth of 0.8%.
- Future hopes hinge on the “dynamics of services” and potential recovery within the construction sector, driven by an increase in demand for mortgage loans thanks to lower ECB rates.
Government Response: Economic Support Plan
In an attempt to alleviate the crisis, the German government launched an economic support plan in early July. This comprehensive plan includes nearly 50 measures aimed at spurring growth:
- Tax breaks for households and businesses.
- Reducing bureaucratic hurdles.
- Focus on incentivizing investments in key sectors.
Despite these efforts, the measures are deemed insufficient against the backdrop of an estimated investment need of 600 billion euros over the next decade to modernize infrastructure and facilitate ecological and digital transitions.
The Constraint of National Budgetary Rules
A ruling by the Constitutional Court in November has further restricted the government’s ability to accumulate debt, citing national rules of budgetary discipline. This has thwarted attempts by the left-leaning factions within the government to propose reforms.
Conversely, the Finance Minister, Christian Lindner of the Liberal party, stands firm against any changes to these budgetary rules, prioritizing fiscal conservatism over economic stimulus.
Conclusion
Ultimately, Germany finds itself at a critical juncture, challenged not just by immediate economic indicators but also by underlying structural issues that threaten its position within Europe. The narrative of the “sick man of Europe” isn’t just a reflection of current economic conditions; it’s a forewarning of the potential long-term impact if decisive action is not taken.
