Dark clouds have settled over Germany. What was once the locomotive of Europe is now one of the worst economies in the entire old continent (in terms of growth). With high interest rates strangling consumption, higher energy prices following the end of cheap Russian gas and exports weighed down by a weaker global economy, a perfect storm has descended on the country. This entire cocktail of problems has put its great bastion, the industry, in a weak situation, while other tensions have continued to plague other fronts, such as a brick crisis that has put sectors such as finance and real estate in check.
All these factors have led to the European country recording a drop in its GDP of 0.3% in 2023, with a resounding decrease of 0.5% in the last quarter of the year. A situation of pessimism that has spread in the first months of 2024, with its economy minister, Robert Habeck, ensuring that “the economy is in turbulent waters.” However, the latest data on various fronts (from GDP, business confidence and passing through trade), have ignited the idea among analysts that something has changed in the German crisis. The ‘sick man of Europe’ could be seeing his symptoms fade and, although there is still a long way to go before he roars again, he would have already hit the ground and returned to the path of growth.
These have been the conclusions of various experts after the publication of the GDP data for the first quarter of 2024, in which the country saw its economy rebound by 0.2% year-on-year supported by an improvement in exports and a better-than-expected trade balance. Jorg Kramer, economist at Commerzbank, explains that “after the latest data we expect the economy to stagnate in an advance with slight advances, even though we expected another correction of 0.3%.” The expert assures that “expectations were for a drop (in first quarter GDP) and instead an improvement has occurred.”
In that sense, Kramer points out that the latest succession of data marks a before and after in the perspectives. “Everything points to a recovery, especially as ECB policy appears to change and energy prices are easing“. In any case, Commerzbank experts point out that two major drags such as “moody” consumption and weak industry and construction “will prevent an acceleration of growth until the second half.” Even then Kramer sees a “limited boost.” because “monetary policy will only ease slightly and there are numerous structural problems that remain largely unanswered.”
Regarding the ECB, there has been a great paradigm shift, with the Central Bank seeing European inflation drop to 2.4%, close to the target. In addition, the Producer Price Index fell 1% at once in March, the largest drop since May of last year and already falls 8.3% year-on-year. In Germany, furthermore, this disinflation process is being experienced with special clarity, with core inflation already falling to 3% and general inflation at 2.2%. In this context, both Lagarde and a succession of members of the ECB have indicated June as the first date for a rate cut. For its part, the swaps market (OIs) is betting on four cuts of 25 basis points by 2024.
Aside from the GDP data and the hope in a more lax ECB to help the recovery. The climate of the German industry was gradually returning to believe in the companies in the sector themselves. In fact, the IFO business confidence index has already had three consecutive months of strong promotions going from 85 points in January to 89.4 in April. For context, this is its highest confidence point since May 2023.
One of the reasons Commerzbank points out to explain this greater optimism is not only the ECB, but much more contained energy prices. In 2022 the cost of electricity and gas tripled for German companies but “since then That increase has already been reversed by around two thirds. due to a normalization of both items.” The firm’s experts point out that “as a result, the production of industrial sectors with intensive use of energy have recovered.”
“This rebound in GDP will continue in the second quarter”
Germany’s manufacturing PMI is still in contraction territory, at 42.5 points (50 points marks growth), where it has been since July 2022. However, it is already far from its lowest levels, reached in summer 2023, where it was below 39 points. In any case, the latest data make it clear that the road for its secondary sector will be bumpy and the recovery will be complicated. Well, industrial production has fallen 0.4% after rebounding in January and February.
For his part, ING analyst Carsten Brzeski argued that “although growth and Germany in the same sentence are a rarity, the reality is that optimism has returned.” In that sense, the Dutch firm pointed not only to this increase in industrial production. But it points out two other factors that have been key to explaining the improvement in the situation. On the one hand “a strong rebound in construction supported by a mild climate“. Secondly, he points out that “even private consumption seems to be showing tentative signs of a recovery.”
Two elements that imply that “This GDP rebound will continue in the second quarter“Other analysts, such as those at Commerzbank, are not clear about this growth in the second part of the year and, after the latest industrial production data, they suggest that the recovery will be postponed until the second half of the year. However, there is a third point that points out Brzeski and that is especially key, since it is one of the greatest strengths of the German economy. It seems that sales abroad are experiencing a good moment “with a clear rebound.”
Germany’s great weapon shines again
Exports are a capital issue and one of the keys to the recovery of the German economy. The Minister of Economy himself, Robert Habeck, warned that it was precisely Germany’s dependence on foreign sales that has largely triggered the current situation. “This dependency has made Germany very vulnerable“.
That is why an improvement on this front is one of the keys to optimism among experts, since the ratio of trade to GDP in 2022 reached close to 99.88% in 2022, with exports representing close to 50% of its entire economy. This contrasts with the world average, where only 31% of GDP corresponds to these sales abroad, according to data from the World Bank. In the United Kingdom it barely reaches 33.4%, compared to 34.7% in France, 36% in Italy or 40% in Spain. It is the country most dependent on foreign countries among the large countries in Europe.
In this sense, the fact that exports have grown in monthly terms by 0.9% according to data from the Federal Statistics Office (Destatis), after falling 2% in February, has been received as great news. From ING they pointed out that these latest data indicated that “the export-based growth model is back“. In any case, the Dutch firm aims for a return to its classic formula, but not without risks and, in fact, it is exposed to great risks. “It would be misleading to trust in a return to its externally oriented model of success, in particular due to geopolitical risks, trade tensions and growing competition (with products such as Chinese ones).
There is still a long journey through the desert
However, just because Germany has hit the ground does not mean that its situation is good, or that this path is not fraught with danger. The Bundesbank insisted on this in its latest report in which, despite recognizing that “the greater industrial production and exports are supporting the German economy“, he clarified that “the fundamentals are still weak.” In that sense, he pointed out, for example, construction where “exceptionally strong growth” has been achieved due to better-than-expected weather conditions, but “it is likely that this will fall again in the next months”.
In that sense, the German institution stated that, “with a still weak industry,” there are still “no signs of sustained improvement in the economy and headwinds persist from several directions.” Among these burdens, high financing costs (due to high interest rates) and greater uncertainty in economic policy stand out, two factors that “are clearly slowing down business investment“In addition, despite the improvement in sales abroad, the Bundesbank understands that “demand for German products is still weak.”
Brzeski defends for his part that, “even though the sun now seems to be finally shining, not everything is well again.” The Dutch bank expert points out that “the growing number of insolvencies and restructurings threaten to emerge as a risk for the labor market this year.” Strength in this area is one of Germany’s great assets. From the Bundesbank itself they point out that “the labor market remains strong and the prospects for the coming months have improved.” The unemployment rate stands at 5.9%.
“Germany’s economic cycle has definitely started to improve”
The International Monetary Fund also points to other factors that will continue to shake Germany. “Some experts say Germany’s economic model is irreparably broken,” explained IMF economist Kevin Fletcher. However, the expert pointed out that “there is a substantial recovery picture for Germany, as the increase in energy costs is temporary and concerns of widespread deindustrialization are exaggerated.
For Fletcher “the structural obstacle that we do see is productivity and the demographic situation.” Germany’s working-age population “has been boosted over the last decade by immigrants.” In this sense, the expert points out that “as this immigration wave ends and baby boomers retire In the next five years, the growth rate of the German labor force will fall more than in any other G7 country. This situation will “put downward pressure on GDP per person because there will be fewer workers for each retiree.”
There are analysts who even deny that there will be even the slightest bit of recovery. This is the case of the consulting firm IW, which speaks in its latest report that, despite the fact that the German Government expects an advance of 0.3% of GDP in 2024, the country’s economy will remain exactly where it was, without moving not a tenth. A total stagnation because “despite an improvement in consumption, for it to abandon its current situation it would need investments to be launched and now huge gaps have been created“. They also expect that foreign trade will amount to less than expected and believe that the labor market will end up capitulating and we will see “an unemployment rate that increases above 6.”
From ING they agree that the problems that have been gripping Germany for a year and a half will continue to be there and that any economic rebound will always be qualified by them. Despite everything, they do not see such a dark outlook and defend that the ground of its economy already seems firmly established. In that sense, although there remains an arduous path to once again be the continent’s beacon in terms of growth, the reality is that “the cycle has definitely begun to improve.”
