From Europe’s powerhouse to the weak link: Germany’s economy sputters – Financial Times | Vette Leader

Christian Lindner, Germany’s finance minister, didn’t cut his teeth when describing the grim new reality facing Europe’s largest economy.

The country’s prospects have become “brittle,” he said on Wednesday. Growth forecasts have been downgraded. Life has become “much more expensive for many people”, with rising prices for gas, energy and food.

Germany is experiencing a wave of shocks clouding its economic prospects. In addition to rising inflation, ongoing supply chain issues and weaker global demand are weighing heavily on the industrial sector.

“What is most concerning is how broad-based the economic downturn is,” said Clemens Fuest, head of the Ifo Institute, a think tank. In previous downturns, services suffered but industry rallied and vice versa. “But now we see weakness everywhere.”

The Eurozone’s powerhouse has become its weak link. Germany’s economy stagnated between the first and second quarters, while the common currency area grew by a total of 0.7 percent. Last month, the IMF cut its forecast for German growth in 2023 by 1.9 percentage points to 0.8 percent, the biggest downgrade of any country.

While Italy, Spain and France saw stronger-than-expected growth due to a tourism boom, Germany had to rely more on domestic demand. However, with consumers suffering from high inflation, spending and confidence are fragile. Retail sales fell 8.8 percent year-on-year – the biggest drop on record.

A drop in water levels on the Rhine is affecting river traffic in one of Germany’s most industrialized areas © Sascha Steinbach/EPA-EFE/Shutterstock

“People feel very insecure,” said Monika Schnitzer, economics professor at the Ludwig Maximilian University in Munich and a member of the Federal Government’s committee of economists. “They’ve been told to hold back money for higher energy bills and that 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 on the Rhine affecting river traffic in one of Germany’s most industrialized areas, recent tensions between Beijing and Taiwan and the prospect of a global downturn – always a concern for exports. oriented economies like Germany.

The BDI, Germany’s main business lobby, said late last month that a recession was becoming increasingly likely. Both ordinary people and businesses suffered as higher energy prices fueled inflation, while China’s zero-Covid strategy “paralyzed world trade”.

Schnitzer said a lot depends on whether Russia turns off the gas tap completely and whether Beijing shuts down ports and factories should the number of Covid-19 cases rise.

“If we pull through and things don’t get worse in the US and China, maybe we can avoid a recession, but even then we can’t expect a significant recovery,” she said. “Either way, the uncertainty is just huge at the moment.”

Recent data has provided ammunition for those predicting a downturn. Last month, the business climate index, closely monitored by Ifo, fell to its lowest level in more than two years.

Although industrial production rose slightly in June, orders fell 0.4 percent – the fifth straight monthly decline – and are now 9 percent below their year-earlier level.

The challenge for companies over the coming months will be to navigate a course between the Scylla of ongoing supply chain problems and the Charybdis of rising gas prices. “They don’t expect any relief from either of them,” said Fuest from Ifo.

Around 73.3 percent of the companies surveyed by ifo in July said they were suffering from bottlenecks, with around 90 percent of companies in the electronics, mechanical engineering and automotive sectors having difficulties in procuring all the materials and preliminary products they needed.

An even bigger problem is rising energy prices. Hans Jürgen Kerkhoff, President of the Steel Industry Association, said that the steel industry will incur additional costs of around 7 billion euros per year as a result of the rising gas and electricity bills compared to 2021. The government’s plans to impose a levy on gas consumers to help struggling gas utilities “would add another billion,” the group said.

For other companies, it’s the instability that’s most troubling. Claus Bauer, CFO of the automotive supplier Schaeffler, said: “We are talking about a tripling [of energy prices] one day, the next day by 30 percent. He added that his company had contracts in place until the end of the year.

Some companies are more optimistic. One is the Bonn-based Deutsche Post DHL, one of the top-selling logistics groups in the world, which posted record profits last year.

“In my view, the current forecasts of some economists are too pessimistic,” said CEO Frank Appel. “We don’t see a recession in our figures yet.”

Weaker global demand has pushed oil prices lower, which Appel said would mean lower inflation. “Furthermore, rates in air and sea freight are falling,” he said. “These are healthy trends.”

There are other glimmers of hope. “For companies to have such a large order backlog . . . speaks against a recession,” said Nils Jannsen from the Kiel Institute for the World Economy. That should allow them to ramp up production even if orders are stagnant or cancelled, he added.

The federal government isn’t too troubled by the grim statistics. “Many companies tell us that even if they don’t get new orders, they will still be employed in the next two years,” an official said.

A recession is still possible, he said, but it could be “a gentle one – where growth is below zero for two quarters but everything feels fine, businesses can pay their bills and we can help everyone through the winter.” .

However, the prospects are so worrying that the government is preparing to launch its third aid package for the population since the outbreak of war in Ukraine. Lindner said on Wednesday that he wanted to increase income tax allowances and increase child benefit and the allowance. “We are in a situation where we have to act,” he said.

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