The German economy is weakening and experts expect economic output to decline this year. They are more optimistic for 2023 – but are calling for government action.
There is a slump in the German economy. And the current data suggests it: an invigorating breeze is not to be expected. Industrial production fell by almost two percent in July compared to July 2022. And new orders to the manufacturing industry have also fallen by twelve percent. “Order books are empty, inventories are full, and that has never been a good sign for industrial production in the coming months,” says Carsten Brzeski, chief economist at ING Bank.
The forecasts for the German economy are correspondingly negative. The ifo Institute expects German economic output to decline by 0.4 percent this year. Experts from the German Institute for Economic Research (DIW) also expect a decline of 0.4 percent. The RWI – Leibniz Institute for Economic Research is even more pessimistic, expecting the economy to shrink by 0.6 percent.
There are no buyers
Other economic institutes such as the Leibniz Institute for Economic Research Halle (IWH) and the Kiel Institute for the World Economy (IfW) also see an economic slowdown in Germany in 2023. However, experts expect growth again in the next two years. According to the IWH, it should increase by 0.9 percent in 2024 and even by 1.2 percent according to the DIW.
But where will growth come from? The German economic model is shaky. “We had an export-oriented business model for 20 years,” says Brzeski. “We have always had the advantage that there was always a country somewhere in the world that was catching up and therefore had high demand for capital goods.”
There is currently no such growth country. China came through the crisis much weaker than expected and has recovered more slowly than expected. Other countries are consistently working to strengthen their economies. With its “Inflation Reduction Act”, the USA is ensuring an investment boom in the energy transition. Tax cuts are also intended to attract foreign companies.
planning security would help
Experts fear that the German economy is listening to this call and could partially succumb to it. So it’s time to take care of the domestic economy, says ING analyst Brzeski. “We have invested too little in infrastructure and education over the last ten or 15 years,” he complains. It is neither the pandemic nor the war in Ukraine that the German economy is stagnating, “but that is also self-made, homemade.”
The economist believes that a “Germany pact” like the one proposed by Chancellor Olaf Scholz makes sense, but it will have to be forged in the coming years. It is not enough to get the economy through the winter with subsidies. One of the most important subsidies, we hear again and again, is planning security.
According to DIW boss Marcel Fratzscher, a clever transformation program could strengthen both supply and demand – for example by politicians reducing bureaucracy and regulation, investing in infrastructure, education and research and paying attention to social balance. However, he believes warnings of Germany’s decline regardless of the current economic weakness are exaggerated. “No, Germany is not the sick man of Europe,” said Fratzscher today when presenting the new forecasts. “It could become so if important reforms are not made now.”
Growth prospects without strengthening the location factors mew
The IfW’s head of economic development, Stefan Kooths, also points to necessary measures by the federal government: “Growth is not fate. What is now important is to strengthen the location factors in economic policy that you have control over yourself – keywords education, infrastructure, bureaucracy, tax rate – and to become more attractive to foreign skilled workers.”
Otherwise, the growth prospects for Germany are poor. The production potential of the domestic economy could decline noticeably in the next few years and then only allow annual growth rates of 0.4 percent, as the IfW announced. That would be less than a third of the long-term average of 1.3 percent. An aging society and the resulting loss of workers are an obstacle, as are the consequences of the corona pandemic and the energy crisis.
In general, the mood is currently significantly worse than reality, emphasizes DIW boss Fratzscher. Politicians and companies must therefore be careful “that economic worries and fears do not escalate further and lead to an economic downward spiral.”
With information from Stefan Wolff, ARD financial editorial team.