Trade wars: Germany’s slide into recession

Germany is feeling the effects of the slowdown in global trade more strongly than the rest of Europe because its manufacturing sector heavily relies on the world market. And the manufacturing industry accounts for around a quarter of Germany's economic output. EPA-EFE/DAVID HECKER [EPA-EFE/DAVID HECKER]

Germany is facing a recession, with business confidence plunging to levels not seen since the global economic crisis of 2009. As a result, calls for increased investment are growing louder – but possibly for the wrong reasons, EURACTIV Germany reports.

For months, observers have been calling on the German government to increase investments and deviate from the country’s self-imposed austerity in order to restart the economy.

Investments in infrastructure, in particular, are seen as a potential recipe against the recession into which Germany is expected to slide.

The country’s gross domestic product (GDP) contracted by 0.1% in the second quarter of 2019, the worst figure among eurozone countries. If the trend continues into the third quarter, the German economy will officially be in recession.

However, government aid would hardly help against a recession, said Timo Wollmershäuser, head of economic research at the Ifo institute. According to him, it would take far too long for the effects of such investments to materialise.

The main reason behind the contraction of Germany’s GDP is the poor numbers coming from industry, in particular, the automotive sector, Wollmershäuser told

Registration figures in China are declining, and customs disputes with the US are weakening trade. And the potential imminent hard Brexit is further clouding the economic climate.

Germany is feeling the effects of the slowdown in global trade more strongly than the rest of Europe because its manufacturing sector is heavily reliant on exports. And the manufacturing industry accounts for around a quarter of Germany’s economic output, which is almost ten percentage points above the EU average.

As a result, German industry has been recording declining figures for four quarters in a row.

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Relieving the burden on companies 

So far, the construction sector has been relatively undisturbed. But additional investments in infrastructure projects would not strengthen the economy, Wollmershäuser warned. Instead, they would only increase already high prices in the sector.

“The last thing companies need now is government construction contracts. What would help cushion the economic downturn is easing the pressure on private investment,” said Wollmershäuser.

The Ifo business climate index, which reflects companies’ sentiment, reached its lowest level since November 2012 in August. Pessimism dominates, especially among industrialists.

According to the Ifo, the mood is as bad as during the 2008 financial previous crisis, with many companies thinking about layoffs and employing more workers on short-term contracts.

The good news is that unemployment remains low, with Germany’s unemployment rate standing at 3.1%, the lowest in the EU.

For employment levels to remain this high, the Ifo recommends faster depreciation options. This would make it worthwhile for companies to invest today, as the tax burden would be directly reduced.

As a second option, the institute suggested that the so-called solidarity surcharge (Solidaritätszuschlag in German) should be introduced at the beginning of 2020 instead of waiting until 2021, as currently planned. This should also apply to all taxpayers, including companies that have so far mainly been excluded.

“Government grants as part of an economic stimulus package is not very effective in the current economic situation,” Ifo’s chief economist added. According to Wollmershäuser, government grants should always be made independently of economic developments when they are necessary and not according to the availability of funds.

This applies not only to the infrastructure and construction sectors but also to the energy sector. In any case, such investments would have to be made while strengthening the private sector.

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Rapid rethinking

The demands for increased government investment are relevant regardless of the current economic situation.

And there is always room for an increase in investments: in the first half of 2019, Germany achieved a financing surplus of around €45.3 billion, as the federal statistical office announced on Tuesday (27 August). This is a surplus ratio of 2.7% of GDP.

Andreas Bley, the chief economist of the National Association of German Cooperative Banks, also described the German economic policy as insufficiently “growth-oriented”.

“Because of the current economic slowdown, we hope for a rethink in the German government,” he added.

This rethinking must come quickly, according to Bley.

“The strongly export-oriented German economy will, in all likelihood continue to come under pressure in the coming years. There is no end in sight to the trade conflict between the US and China, and the consequences of the Brexit cannot yet be assessed,” Bley said.

On Tuesday (27 August), KfW Research also revised its economic forecast significantly downwards – from 0.8% to 0.4% in 2019 and from 1.8% to 0.6% in 2020. These forecasts factor in the consequences of a ‘hard’ Brexit on 31 October, according to Klaus Borger, an economist at KfW Research.

After that, the situation will improve somewhat, he said.

“With Brexit losses ultimately limited and a temporary easing of trade conflicts in the run-up to the US elections, we expect a return to growth next year, after initial stagnation,” Borger added.

Risks facing the world economy are chiefly geopolitical and the cause of many headaches for economic analysts. And this makes things no less unpredictable.

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[Edited by Frédéric Simon]

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