Germany: Maybe It’s Time (To Let The Old Ways Die)

From stellar growth to the brink of recession within less than a year. Germany needs more than good luck to return to the European pole position.

Only one year ago, German growth forecasts were being revised upwards almost by the day. No end to the ten-year supercycle was in sight. Instead, another year of stellar performance was on the cards, driven by strong domestic demand and rebounding exports on the back of a weak euro.

Now, it seems as if Germany’s growth prospects are diminishing by the day. A disappointing second half of 2018, bringing the economy close to a technical recession, has returned swan songs on the German Wirtschaftswunder, or economic miracle if you prefer. The truth, as so often in Europe, is probably somewhere in the middle.

Cars, cars, cars

The main reason for the unexpected cooling of the economy in the second half of 2018 is cars. Missed deadlines for the admission of new emission standards led to an enormous inventory build-up in the second and third quarter of the year and, consequently, very weak sales and now production performances. Also, the announced ban on cars with old diesel engines for several German cities has not only weakened car sales but also led to precautionary savings by households over the summer months. Lastly, still remotely related to cars, the drop in global oil prices did not initially bring relief to German customers as cheaper oil did not reach petrol stations or heating oil companies due to low water levels in many German rivers.

And even though the automotive industry is key for the entire economy with a direct and indirect impact on up to 10% of German employment, there is more to the industrial slowdown than simply cars. In fact, the last significant quarterly surge in industrial production dates back to the fourth quarter of 2017. Since then, industrial production has been treading water, first on the back of supply-side constraints and more recently on the back of weakening demand.

Still, the automotive industry illustrates the wider problem in the German economy: the slowdown is a combination of one-off and structural factors. Just think of the harsh winter weather, unusually high sick leave due to the flu, the timing of Easter and holiday, strikes and, more recently, low water levels in main rivers, but also of the lack of investment in digital and traditional infrastructure, delays of railways and airlines, and barely any significant new structural reforms for the past ten years. The future path of the economy clearly depends on which of the factors weighs more. If it’s one-off factors, then a rebound of the entire economy looks plausible. If it's structural factors, then the German economy should be prepared for a long period of underperformance.

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Susan Miller 9 months ago Member's comment

What a nice read.