Yet there has been some positive news in Germany in recent days. Europe's largest economy grew by 0.2% in the third quarter, defying pessimistic expectations that predicted another contraction. This means that after the decline in the second quarter, Germany will avoid falling into recession (two consecutive quarters of negative growth). Recall that in the previous reporting period (from April to June 2024) the German economy recorded a decline of 0.3 percent.
“A technical recession has been avoided for now, but the German economy remains only slightly larger than it was at the beginning of the Covid-19 pandemic“, notes economist Carsten Brzeski from ING Bank.
Winter of discontent?
However, other current economic indicators do not contribute to raising the mood. For example, inflation is 2.4% on an annual basis, which is an increase compared to the 1.8% registered last month. This could cause some concern in Frankfurt, given that the European Central Bank (ECB) appears to have fully embraced a cycle of aggressive interest rate cuts.
According to preliminary data published by the Federal Employment Agency, unemployment remained stable at 6% in October. However, October is usually the month in which unemployment falls. “The autumn upturn in the labor market has largely failed to materialize this year“, said the agency's head, Andrea Nahles.
However, some business sentiment surveys show a stabilization, or even a recovery. According to the latest survey published by the ifo Institute in Munich, business sentiment improved in October, which is the first time in four months.
There is also good news
“This stabilization is very positive, it is a good sign“, Clemens Fust, president of the ifo Institute in Munich, told DW: “Is this a change in trend? It is too early to say - not before we have seen whether the trend will continue in the coming months. But companies are telling us that in the next six months at least they do not expect the situation to deteriorate further“, the expert said.
This moderate sense of optimism is supported by surprisingly good retail data in Germany in September: sales increased by 1.2%, which exceeded forecasts. The overall picture, however, remains bleak: the latest study by the German Chamber of Industry and Commerce (DIHK) says the German economy is losing ground in Europe and the world. “Too little investment, too much bureaucracy and too high production costs: the German economy is at a dead end“, said Martin Wansleben, CEO of the chamber.
According to him, many companies believe the situation will worsen next year. “For 2024, we are reducing our forecast to zero growth at best, which we also expect next year. This will be the third year in a row without real GDP growth“, he emphasizes.
Government tries to find a solution
The poor state of the economy has become a pressing issue for the country's increasingly unpopular three-party coalition government. On Tuesday, Chancellor Olaf Scholz invited business leaders and unions to a summit to find a way out of the crisis.
However, the meeting itself became a clear demonstration of the political division in the ruling coalition: neither the Green Party's Economics Minister Robert Habeck nor the liberal Free Democratic Party's Finance Minister Christian Lindner were present. Both made their views on the subject known at separate events that day.
The root causes of the crisis
Many experts agree on the root causes of the crisis. The main view is that the Covid pandemic and the war in Ukraine have fundamentally tested Germany's export-oriented economic model, while rising energy costs and high inflation have wreaked havoc in many sectors.
Dependence on Russian hydrocarbons and China as a huge market for German exports are a huge burden on the German economy. At the same time, decades of underinvestment, driven by strict rules on the so-called debt brake on government debt, have led to a range of problems - from crumbling infrastructure to an economy that has failed to truly embrace digitalization and innovation.
The current problems of Volkswagen (one of the iconic German companies) seem to epitomize the whole problem. Germany's obvious vulnerability to events in other countries - from China to the United States to Ukraine - combined with the problems of the country's current government, suggests that there is little hope for a turnaround in the near future.
Author: Arthur Sullivan