Will the German Recession Last Long?

Germany, Europe’s largest economy, is facing a prolonged and painful downturn, as the latest reports from the government and international institutions show no signs of a swift and robust recovery.

The German Ministry of Economy said that the economic outlook for the coming months remained bleak, based on weak indicators such as new orders and business confidence.

The ministry acknowledged that the domestic economy was showing some signs of improvement, thanks to lower energy prices and a gradual rebound in consumer spending and services.

But it warned that these positive factors were likely to be overshadowed by the persistent challenges of the global environment.

“The still weak external demand, the continuing geopolitical uncertainties, the still high rates of price increases, and the increasingly noticeable effects of monetary tightening are dampening a stronger economic recovery,” the ministry said in its monthly report.

 

Pessimist Forecast

The International Monetary Fund (IMF) echoed this pessimistic assessment in its latest forecast for Germany, released in late July.

The IMF projected that Germany’s gross domestic product would shrink by 0.3 percent this year, after contracting by 0.6 percent in 2022.

The IMF also lowered its growth estimate for 2024 from 1.9 percent to 1.7 percent, citing the uncertainty and risks posed by the pandemic and its variants.

The official statistics office confirmed that Germany had entered a technical recession in the first half of 2023, with two consecutive quarters of negative growth.

The GDP fell by 0.3 percent in the first quarter and by 0.2 percent in the second quarter, mainly due to a slump in exports and industrial production.

The third quarter is unlikely to bring any relief, according to a survey conducted by Bloomberg among economists.

The survey predicted that the German economy would stagnate in the July–September period, before growing by a meager 0.1 percent in the year’s final quarter.

 

Heavy Toll

The economic slowdown has taken a heavy toll on German businesses, especially small and medium-sized enterprises, which account for more than half of the country’s output and employment.

The number of corporate insolvencies has surged in recent months, as many firms have run out of cash and credit amid falling revenues and rising costs.

The Federal Statistics Office reported that 1,478 companies filed for bankruptcy in May, an increase of 19 percent compared to the same month last year.

The total debts of these companies amounted to about 4 billion euros ($4.7 billion), twice as much as in May 2022.

The rising number of bankruptcies has raised concerns about the stability of the banking sector, which has already been struggling with low profitability and high non-performing loans.

The government has extended its emergency loan programs for businesses until the end of the year, but some analysts fear that this may only delay the inevitable wave of defaults and closures.

The economic crisis has also put pressure on Chancellor Olaf Scholz’s ruling coalition, where the main opposition parties have criticized Scholz’s handling of the pandemic and the recovery, accusing him of being too cautious and complacent.

Many voters remain skeptical and disillusioned with the political establishment, as evidenced by the rise of alternative parties such as the Greens and the far-right Alternative for Germany (AfD).

The latest polls show that no party or coalition has a clear majority or advantage, making the outcome of the election highly uncertain and unpredictable.

 

Energy Crisis

triggered an energy crisis that sent inflation soaring. Despite the government’s efforts to mitigate the impact of these events, the country’s economic recovery remains sluggish and uncertain.

The Covid-19 outbreak in 2020 caused a sharp contraction in Germany’s gross domestic product in the first and second quarters of that year. Although the economy rebounded in the second half of 2020, it was not enough to make up for the losses.

The war in Ukraine, which erupted in late 2022, added another layer of difficulty as it disrupted the supply of natural gas from Russia, a major energy source for Germany.

The government responded by imposing energy austerity measures and increasing its reliance on liquefied gas imports, but this did not prevent inflation from reaching its highest level in decades.

In July 2023, energy prices in Germany dropped slightly, and inflation eased by 0.2% from the previous month.

However, inflation remained high compared to the same period last year, and consumer spending, a key driver of economic growth, did not pick up.

Some analysts have argued that the root cause of Germany’s economic woes lies in its dependence on foreign markets, which makes it vulnerable to global shocks.

Germany’s export-oriented industries have suffered from a decline in demand from its main trading partners over the past three years.

The pandemic lockdowns, as well as the war in Ukraine, have reduced orders for German goods. According to local reports, accumulated orders for industries fell by 3.3% compared to the same time last year.

The European Central Bank’s decision to raise interest rates in June to curb inflation has dampened the prospects for construction, one of the key sectors that had supported Germany’s growth in the past. Many builders and developers have postponed or canceled their projects due to higher financing costs.

Despite the economic contraction, however, Germany has not experienced a surge in unemployment as it did during the global financial crisis of 2008–2009.

On the contrary, the labor market has remained tight, with companies struggling to find and retain qualified workers. The unemployment rate was only 2.9% in May, one of the lowest levels on record, and well below the eurozone average of 6.5%.