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The German economy is on shaky ground and there are few signs of hope

by SuperiorInvest

Federal Chancellor Olaf Scholz (SPD, rl), Robert Habeck (Alliance 90/The Greens), Federal Minister for Economic Affairs and Climate Protection, and Christian Lindner (FDP), Federal Minister of Finance, follow the debate at the start of the week budget.

Michael Kappeler | Image Alliance | fake images

There has been little good news for the German economy. And the latest economic data has done little to change this.

Some key data for 2023, namely factory orders, exports and industrial production, were released last week and indicated a weak end to the year that saw doubts resurface about Germany being the “sick man of Europe.”

“The data confirms that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.

Industrial production decreased 1.6% monthly in December and 1.5% in 2023 overall compared to the previous year. Exports, which are an important cornerstone of the German economy, fell 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), over the year.

Meanwhile, factory order data looked promising at first glance, reflecting an 8.9% increase in December compared to November.

But this growth “is not a big reason to feel comfortable,” Franziska Palmas, senior European economist at Capital Economics, told CNBC, explaining that it is due to several large-scale orders, which tend to be volatile. “Orders, excluding large-scale orders, actually fell to a post-pandemic low,” she added.

For the year 2023 overall compared to the previous year, factory orders decreased by 5.9%.

While this “hard” December data does not yet suggest that recovery is in sight, the latest Purchasing Managers' Index report indicates that the worst may soon be over in the manufacturing sector, Schmieding said.

“Although 45.5 is still below the 50 line that divides growth from contraction, it rose to an 11-month high,” he noted.

Still, economic growth is unlikely to be imminent, Erik-Jan van Harn, global economics and markets macro strategist at Rabobank, told CNBC.

“We are still nowhere near the kind of activity in German industry that we saw before the pandemic,” he explained. “We still expect a modest contraction in the first quarter, but it is likely to be less severe than in 23Q4,” van Harn said. He then anticipates growth will recover slightly, but sees full-year growth remaining stable.

Others are even more pessimistic about the German economy.

“We stand by our forecast that the German economy will contract by 0.3% as a whole in 2024,” Commerzbank chief economist Jörg Krämer told CNBC.

This would be largely in line with how the German economy fared in 2023, when it contracted 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% drop in gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.

This is because the statistics office concluded that the third quarter of 2023 saw stagnation rather than contraction. But if the economy were to contract as expected in the first three months of 2024, Germany would effectively fall into recession.

“Businesses simply have a lot to digest: global tariff increases, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explained, addressing the reasons for the crisis.

Some of these obstacles can also play a key role when it comes to weakening export figures, said Rabobank's van Harn. Factors such as cheap energy from Russia, strong demand from China and growing global trade boosted Germany's exports for decades, “but now they are faltering,” he said.

Beyond the purely economic, national and international politics could also represent a risk for the country's economy, experts say.

Germany sets its sights on the 2024 budget

Germany's coalition government has been under pressure after experiencing a budget crisis following a constitutional court decision that reallocating unused debt acquired during the pandemic to current budget plans is illegal.

This left a €60 billion hole in the coalition's budget plans and, as funds were allocated for years to come, the crisis is likely to reappear at the end of the year, when budget planning for 2025 begins.

Voter satisfaction with the government is also low: the opposition CDU party currently leads the polls and is followed in second place by Germany's far-right party, the AfD. However, support for the latter has waned in recent weeks amid anti-far-right protests sweeping the country, with hundreds of thousands of Germans taking to the streets.

Elsewhere, the US elections could also complicate matters, Schmieding suggested.

“Trump's trade war threats could be significantly negative for Germany,” he said; However, this, of course, depends on the outcome of the elections and may not develop in full force until 2025, he noted.

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