Christian Lindner, Germany’s finance minister, pulled no punches in describing the grim new reality facing Europe’s largest economy.
The country’s outlook had become “fragile”, he said on Wednesday. Growth forecasts were being downgraded. Life had become “a lot more expensive for a lot of people”, with gas, energy and food prices rising.
Germany is experiencing a storm of shocks that are clouding its economic outlook. Along with rising inflation, persistent supply chain issues and weaker global demand are weighing heavily on its industrial sector.
“What is more worrying is the broad base of weakness in the economy,” said Clemens Fuest, head of the Ifo Institute, a think tank. In previous downturns, services suffered, but industry recovered, and vice versa. “But now we’re seeing weakness across the board.”
The power of the Eurozone has become its weak link. The German economy stagnated between the first and second quarters, while the single currency area as a whole grew by 0.7%. Last month, the IMF cut its forecast for German growth in 2023 by 1.9 percentage points to 0.8%, the biggest cut of any country.
While Italy, Spain and France posted stronger-than-expected growth on the back of a tourism-driven boom, Germany has had to rely more on domestic demand. But with consumers laboring under high inflation, spending and confidence are fragile. Retail sales fell 8.8 percent from a year earlier, the biggest drop on record.
Falling water levels in the Rhine are affecting river traffic in one of Germany’s most industrialized areas © Sascha Steinbach/EPA-EFE/Shutterstock
“People feel very insecure,” said Monika Schnitzer, a professor of economics at Munich’s Ludwig Maximilian University and a member of the group of economists that advises the German government. “They have been told to get their money back for higher energy bills and this has led to a drop in consumption.”
The country’s economy is now so weak that many fear a technical recession, defined as two consecutive quarters of negative growth.
Pessimists point to falling water levels in the Rhine, which is affecting river traffic in one of Germany’s most industrialized areas, the recent rise in tensions between Beijing and Taiwan and the prospect of a global recession. , always a problem for exports. oriented economies such as Germany.
The BDI, Germany’s main business lobby, said late last month that a recession was increasingly likely. Ordinary people and businesses were suffering from higher energy prices fueling inflation, while China’s zero-Covid strategy was “crippling global trade”.
Schnitzer said it depended a lot on whether Russia completely shut off the gas tap and whether Beijing shut down ports and factories if the number of Covid-19 cases rises.
“If we can do that and things don’t get worse in the US and China, we can avoid a recession, but even then we can’t expect a significant recovery,” he said. “In any case, the uncertainty is huge at the moment.”
Recent data has provided ammunition for those predicting a downturn. Last month, Ifo’s closely watched business confidence index fell to its lowest level in more than two years.
While industrial production saw a modest increase in June, orders fell 0.4%, the fifth straight monthly decline, and are now 9% below their year-ago level.
The challenge in the coming months will be for companies to steer a course between the Scylla of ongoing supply chain issues and the Charybdis of rising gas prices. “They don’t expect any relief from either of them,” said Ifo’s Fuest.
Some 73.3 percent of companies surveyed by Ifo in July said they were experiencing shortages, with nearly 90 percent of companies in the electronics, machine building and automobile sectors struggling to acquire all materials and products intermediates they needed.
An even bigger problem is rising energy prices. Hans Jürgen Kerkhoff, president of the German Steel Federation, said the steel industry was incurring additional costs of around 7 billion euros a year, compared to 2021, as bills rose gas and electricity. Government plans to impose a levy on gas consumers to help struggling gas supply companies would “add another billion”, the group said.
For other companies, instability is the biggest concern. Claus Bauer, CFO of auto parts supplier Schaeffler, said: “We are talking about tripling [of energy prices] one day, then down 30 percent the next day.” He added that his company had closed contracts through the end of the year.
Some companies are more optimistic. One is Bonn-based Deutsche Post DHL, one of the world’s largest logistics groups by revenue, which has been posting record profits for the past year.
“The current predictions of some economists are, from my perspective, too pessimistic,” said CEO Frank Appel. “In our numbers, we don’t see a recession yet.”
Weaker global demand has pushed down oil prices, which Appel said would mean lower inflation. “Furthermore, rates are coming down in air transport and sea transport,” he said. “These are healthy trends.”
There are other glimmers of hope. “The fact that companies have such a large order backlog . . . speaks against a recession,” said Nils Jannsen of the Kiel Institute for the World Economy. This should allow them to ramp up production even if orders stagnate or are canceled, he added.
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The German government is not too alarmed by the low statistics. “Many companies are telling us that even if they don’t get new orders, they will still be busy for the next two years,” an official said.
A recession is still a possibility, he said, but it could “be mild, where growth is below zero for two quarters, but everything looks good, businesses can pay their bills and we can help everybody through the winter.” .
However, the outlook is so worrying that the government adopts its third package of relief measures for the population since the war broke out in Ukraine. Lindner said on Wednesday he wanted to raise income tax thresholds as well as increase child benefit and tax-free allowance. “We are in a situation where we have to act,” he said.
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