Germany gets caught in a stagnation

Germany’s economy continues to grapple with stagnation, as confirmed by the Federal Statistical Office, which reported a 0.1 percent decline in GDP for the second quarter. This marks a continuation of the sluggish growth trend that has persisted since early 2022, with quarterly growth rates hovering around the zero line.

The weakening economic momentum has been a concern since 2018, particularly for Germany’s export-driven economy. While the country once thrived on the near-frictionless global trade and robust supply chains of the globalization era, it now faces significant challenges due to rising trade restrictions and geopolitical tensions. Domestically, Germany is also struggling with labor shortages, high energy costs, and insufficient political and administrative support for the necessary transformation of its business models.

The outlook remains bleak in the short term. The persistent pessimism in the corporate sector, reflected in the declining ifo business climate index, coupled with low consumer confidence as shown by the weak GfK consumer climate index, suggests a lack of any positive economic impetus. This downturn is exacerbated by a rise in insolvency applications, raising concerns that the upcoming labor market report could indicate a further increase in unemployment.

The situation poses a risk of a negative economic spiral. With weak demand for export goods offering little hope for economic stabilization, the burden falls on private consumption to drive recovery. However, if unemployment rises and economic prospects remain uncertain, consumers may choose to save rather than spend, further stalling growth.

On a slightly more positive note, the weak economic performance is expected to contribute to a further decline in inflation in August. Preliminary estimates to be released this week are likely to show inflation nearing the European Central Bank’s (ECB) target of 2 percent for both Germany and the eurozone. This could pave the way for the ECB to consider cutting its key interest rate in mid-September.

However, falling interest rates alone may not be enough to reinvigorate the economy. Additional stimulus is necessary to boost investment. A joint growth initiative from both the political and business sectors is crucial to making Germany competitive again. Key areas of focus should include upgrading essential infrastructure, enhancing energy security, advancing digitalization, and adjusting the export portfolio to align with new global realities.

Source: Carsten Mumm, Chief Economist, Privatbank DONNER & REUSCHEL
Photo: DONNER & REUSCHEL