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| Germany will have to work hard to overcome the current period. (Source: EIU) |
The latest figures from Europe's largest economy are not encouraging. According to the German Federal Statistical Office (Destatis), GDP in 2023 is expected to be 0.3% lower than the previous year, making Germany the world's worst-performing major economy.
"Overcoming the barrier"
The IMF and OECD both predict “sadness” for the German economy. One obvious reason is the global downturn in manufacturing that has left German industry – which accounts for a fifth of total output – stagnant.
Political hurdles, the lingering effects of the pandemic, the unpredictable Russia-Ukraine conflict and the uncertain outlook for the Chinese economy are all major obstacles to the recovery of Europe’s number one economic power. On the other hand, recent geopolitical conflicts around the world have contributed to increased instability for Berlin’s economy, which has long been dependent on cheap oil and gas imports from Russia.
The high inflationary pressure is hitting German companies’ production processes, which are optimized for efficiency. According to Destatis, production of cars and other transport equipment recorded significant growth last year, but output fell in energy-intensive industries.
Household and government spending fell for the first time in nearly 20 years. Destatis said this was due to the suspension of government Covid-19 support measures such as vaccinations and compensation to hospitals for free beds.
Overall, the outlook for growth in the new year remains bleak. Europe’s largest economy got off to a rocky start in 2023, with ongoing strikes over wages, working hours and cuts to government fuel subsidies.
Despite falling inflation, prices remain high across Europe's largest economy and have hampered economic growth. Rising interest rates have made it harder for German companies to secure financing, increased operating costs and weakened demand at home and abroad.
The only way?
Recent data from the Bundesbank also shows that in the first half of 2023, foreign direct investment in Germany was only 3.5 billion euros, a "sharp decline" from 34.1 billion euros in the same period in 2022 and the lowest figure in nearly 20 years. Many people have expressed skepticism about the competitiveness and investment attraction of the current German economy.
Innovation has long been a driving force of the German economy, with the country being one of the biggest spenders on R&D in the bloc – at more than 3% of GDP per year.
Moreover, in a world where countries from China to the United States are increasingly subsidizing domestic businesses and enacting policies to protect their domestic economies, Germany also needs to make long-term investments in infrastructure, government efficiency and encouraging a business ecosystem.
This would attract more foreign investment so that Germany and its EU partners can innovate and stay competitive in the global market, said analyst Steven Vass of The Conversation.
Therefore, experts say, the only way to overcome this downward trend is to bet on innovation. Accordingly, the only way forward for Germany is to invest heavily in infrastructure, boost R&D and keep up with new technological developments, as well as promote more effective state activities to help businesses transform themselves and maintain their competitiveness globally.
It is worth noting that Germany's investment level is still the same as a decade ago, while countries like the US and Japan both invest at nearly 3.5% of GDP.
Berlin “wakes up”
The Economist commented that Europe's largest economy had just "awakened", they had fallen asleep in success, until the Russia-Ukraine conflict woke them up.
Recognizing the flaws in the economic structure, high labor costs or other administrative barriers, the German government is ready to change when asked what the government will do to save the economy?
Chancellor Olaf Scholz said his government was setting up new projects at “an astonishing pace” to accelerate the transition to renewable energy and boost the labour supply.
There are signs of hope for Germany’s industrial future. Chipmakers Intel and TSMC, the Taiwanese semiconductor manufacturing giant, have presented plans to build large factories in Germany – although these are only secured by subsidies of around €15 billion.
Most economists say Berlin is on the right track by trying to tackle structural problems rather than introducing short-term fiscal stimulus.
“The German government is addressing a number of important issues,” said Holger Schmieding, chief economist at German bank Berenberg, including amending some laws to speed up priority investments and attract more skilled workers from abroad.
Some economists believe that Germany will not remain in a slump for long. The cyclical difficulties will ease as energy prices fall and exports to China recover.
“I would say that being pessimistic is a bit too much,” and forecasts German economic growth to return to the eurozone average of 1.5% by 2025, said Florian Hense, senior economist at Union Investment Management.
The German consumer market also has prospects for recovery, with wages in the country rising by more than 5%, while inflation is forecast to halve to 3% by 2024. “Increasing real wages are one of the main reasons why we think that only a mild recession” has passed, said Jörg Krämer, chief economist at German bank Commerzbank.
Some optimists believe that the current difficulties will force the government to address labor market and supply-side reforms, which could usher in a new era of superior efficiency, as the country did in the 1990s.
However, Chancellor Olaf Scholz still faces disagreements within the ruling coalition. Many opinions also point out that Germany will have to remove some obstacles to increase investment activities, boost the economy, especially thoroughly solve the bureaucracy and create easier conditions for businesses.
In this regard, Deputy Prime Minister Robert Habeck said that Berlin is implementing many solutions and has achieved some initial results, but also admitted that solving the labor shortage is still a big challenge, especially when the population tends to age. In the immediate future, Germany is trying to attract more legal skilled immigrants as a temporary measure.
Of course, Germany will have to make a lot of efforts to overcome the current stage. However, with its strong potential and extensive manufacturing experience, Germany is fully capable of breaking all barriers to continue to assume the role of Europe's locomotive.
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