London
CNN
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It has been almost two decades since Germany shed its image as the “sick man of Europe” with a series of labor market reforms, leading to years of economic outperformance.
Unfortunately for Berlin, the phrase is making a comeback.
Persistent inflation and three straight quarters of falling or stagnant production have dragged Europe’s largest economy into the doldrums.
So much so that the International Monetary Fund expects the country to be the only advanced economy to shrink this year – with a forecast contraction of 0.3% compared with an average increase of 0.9% for the 20 countries that use the euro, including Germany.
A prolonged recession would be a disappointing outcome for an economy that grew at an average of 2% per year in the decade following the 2008-09 financial crisis, ran a budget surplus most of the time and enjoyed a boom in exports.
According to Stefan Kooths, research director at the Kiehl Institute for the World Economy, Germany is suffering from “a bundle of individual problems” and not from one major disease.
Some of these are temporary, he said, such as a weak Chinese economy reducing demand for the country’s exports, while others, such as a rapidly aging population and a high corporate tax rate, are structural.
The situation has prompted some observers to once again dub Germany the “sick man of Europe”, 25 years after it received that title in the late 1990s and early 2000s – a period marked by weak economic growth and high unemployment.
That designation isn’t “completely wrong this time,” Kooths said, “but it’s a different disease.”
So what’s the diagnosis?
“Pessimism” at home and abroad
Inflation in Germany is higher than in most of its European neighbors. Consumer prices increased by 6.2% in July compared to the same month in 2022, well above the average rate of 5.3% for the euro area as a whole.
According to Thomas Obst, senior economist at the Cologne Institute for Economic Research, “stubborn” inflation is weakening the purchasing power of Germans and fueling “pessimism among households”.
Falling private and public spending is the root cause of the recession — defined as two consecutive quarters of contracting output — that the country experienced last winter, Obst told CNN.
In order to curb rising prices, the European Central Bank has raised its key interest rate to an all-time high of 3.75%. But higher borrowing costs are hitting the German housing sector hard: More than 40 percent of construction companies taking part in a survey by the ifo Institute last month reported a lack of orders, compared to 10.8 percent a year earlier.
“Higher interest rates and drastically increased construction costs are curbing new business,” said Klaus Wohlrabe, head of surveys at ifo.
Frank Soellner/Getty Images
A construction site of a residential building in the German town of Bad Doberan photographed August 22
The broader industrial sector, which includes big-name German manufacturers like Volkswagen and Siemens, has also taken a hit. According to official estimates, industrial production fell by 1.7% yoy in June.
German business activity, in both services and manufacturing, fell in August at the fastest rate since May 2020, when the country was just beginning to gradually lift strict pandemic restrictions, according to data from S&P Global released on Wednesday .
“[German] Industrial order books have emptied over the past 12 months,” Carsten Brzeski, global head of macroeconomic research at ING, told CNN.
“German exports to China are very sluggish [lower] than before the pandemic,” he added.
Sam Reeves/AFP/Getty Images
A truck drives past stacked containers in the German port of Duisburg in June.
China is Germany’s fourth-largest export market, but it has faced a number of economic problems – including slowing growth and record-breaking youth unemployment – that have dampened demand for German goods.
China was still Germany’s second largest export market in 2021. The shift is also the result of more fundamental changes in China’s economy, Brzeski said.
“China has become a competitor and simply doesn’t need as many goods produced in Germany as it used to.”
The pandemic, which has paralyzed supply chains, and the war in Ukraine are responsible for much of Germany’s current misery, Brzeski argues, but many of its problems run deeper and are self-inflicted.
“Germany simply hasn’t implemented any economic reforms in the last ten years,” he said. “[It] has fallen behind [in] In all international rankings when it comes to digitization, infrastructure and international competitiveness, you become aware of this reality.”
One problem – the cost of natural gas – was particularly acute for the energy-guzzling manufacturers.
European gas prices rose to all-time highs last summer. Although they have fallen sharply in recent months, they are rising again as the possibility of a liquefied natural gas (LNG) plant strike in Australia has raised fears of a global supply shortage.
David Hecker/Getty Images
Germany’s Emsland nuclear power plant photographed on the day of its official shutdown, April 15
“The energy price shocks as a result of the outbreak of war in Ukraine hit a highly industrialized country like Germany particularly hard,” said Obst from the Cologne Institute for Economic Research. “The threat of deindustrialization is not just an academic debate.”
Though Germany weathered last year’s energy crisis better than many expected, it is still vulnerable to natural gas supply shortages, economists tell CNN. One of the reasons for this is that the country has completely stopped producing nuclear energy and therefore has fewer energy alternatives compared to neighbors like France.
That “makes the problem of variability in energy supply more serious than in other countries that are also decarbonizing,” said Kooths of the Kiehl Institute. “Germany is in a very special situation.”
Holger Schmieding, the economist who first described Germany as the “sick man of Europe” in 1998, considers the “current wave of pessimism” about its economy to be exaggerated.
The country is in a much stronger position than it was then, Schmieding, now chief economist at Bank Berenberg, wrote in a research note last week. Today, he said, Germany enjoys record levels of employment and strong public finances that make it “much easier to adjust to.” [economic] shocks.”
The government is also taking necessary steps to reform its immigration laws to address labor shortages and speed up planning and approval processes for infrastructure projects, he wrote.
Germany has already shown it can act quickly: last year it approved and built an LNG terminal in a matter of months to overcome its dependence on Russian energy.
This adaptability distinguishes Germany from many other economies, argues Schmieding, and is due to the large number of small and medium-sized enterprises – the Mittelstand – that are able to “react quickly to a changing competitive landscape”.
“Germany is the undisputed world champion of the ‘hidden champions’,” he said.
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