German economy will not grow again until 2024 – inflation slows investment and consumption

Dusseldorf The Handelsblatt Research Institute (HRI) has revised its economic expectations for 2023 and 2024 downwards. The HRI now expects a decline in German economic output of 0.7 percent for the current year and an increase of 0.6 percent for 2024. In its spring forecast, the HRI still expected minus 0.2 percent for 2023 and plus 0.9 percent for 2024. This would put Germany at the bottom of the euro zone.

“The German economy slipped into a veritable recession last winter. The overall economic output will therefore fall noticeably this year,” said HRI President Bert Rürup. In contrast to earlier recessions, however, a subsequent upswing that would quickly make up for the production losses is not to be expected. “Rather, a sluggish growth weakness will follow the recession,” emphasized Rürup.

A recession is usually understood to mean a temporary drop in demand that leads to a decline in economic output that lasts for at least two quarters. Weak growth, on the other hand, is a permanent decline in the overall economic production possibilities, for example due to a lower supply of capital and labour. In the past decade, trend growth – i.e. growth without cyclical and seasonal fluctuations – in Germany was still around 1.5 percent. According to HRI estimates, it has now fallen to less than one percent. “And there is no sign of a trend reversal,” says Rürup.

The German economy has by no means coped well with the double crisis of the corona pandemic and the Ukraine war. In contrast to most other EU economies, overall economic output in the first quarter of 2023 was noticeably lower than before the pandemic began, i.e. at the end of 2019. According to the current HRI forecast, even at the end of 2024 the pre-corona level should only just be reached.

Germany then lacked five years of growth. There has never been such a long phase of overall economic stagnation in German post-war history. Without growth, there are no gains in prosperity and no bubbling sources of taxes and contributions from which the state could finance, for example, the modernization of the Bundeswehr and infrastructure or the consequences of the aging of society.

Economic miracle a long way off

According to official information, the German economy grew by an average of 3.1 percent per year from 1950 to 2022. Growth slowed noticeably over time. But even in the last two decades from 2000 to 2020, real gross domestic product grew by one percent per year – despite the two severe slumps in 2009 and 2020 as a result of the financial crisis and the pandemic.

During the years of the economic boom between 1950 and 1970, the national economy grew by an average of 6.4 percent per year. Chancellor Olaf Scholz (SPD) recently focused on this dynamic when he predicted a “new economic miracle” as a result of decarbonization and the ecological transformation of Germany’s economy and society

The HRI considers such strong growth rates to be unlikely. Even if – as assumed – the Ukraine war does not escalate further and does not spread to NATO territory, there is no energy shortage in the coming winter and there is no global financial crisis despite the rapid interest rate hike by the central banks, Germany’s economy will, after three negative quarters, start the second quarter half of the year are growing very modestly – by an average of around 0.2 percent per quarter.

High inflation is weighing heavily on the economy like lead, even if inflation rates gradually fall. According to the HRI forecast, inflation will average 5.4 percent in 2023 and three percent in 2024 – still well above the ECB’s target of two percent. The European Central Bank is therefore likely to raise its key interest rates twice more, each time by a quarter of a percentage point. At 4.25 percent, the key interest rate would then be at its highest level since the summer of 2008.

Real wages are lower than in 2015

The price hikes over the past two years have squeezed real incomes and wiped out real wealth. By the end of 2024, the price level in Germany should have risen by around 20 percent within four years. In the previous phase, it had taken around 15 years for prices to increase to a comparable extent.

As wages have not kept up with inflation, real wages have fallen for three years in a row. According to the Federal Statistical Office, the real wage index in 2022 was slightly lower than in 2015. On average, employees are already missing seven years of growth in prosperity.

State aid compensated for part of this loss of purchasing power. In addition, there have recently been lavish wage agreements in the first sectors of the economy. However, these mostly concerned the public service or state-related service providers such as the post office; high tariff increases are also being discussed for the railways.

However, only just under half of all employees are employed in a company that is bound by a collective bargaining agreement; all other workers must negotiate wage increases themselves. In addition, in some sectors collective wage increases will take effect this year, which were concluded in times of significantly lower inflation rates – collective agreements are concluded for an average period of around two years.

Since 2023 is likely to be accompanied by further real wage losses for quite a few employees, private consumption will shrink by one percent according to the HRI forecast. In the coming year, the fall in consumption is likely to be made up for. Nevertheless, private consumption will still be significantly lower in real terms than in the pre-Corona year 2019.

High interest rates depress corporate profits

In addition, the turnaround in interest rates is having a negative impact on the economy, since borrowed capital is becoming more expensive for companies. In addition to weaker demand, higher interest rates reduce profits and make investments more expensive, making them less profitable and possibly not being made. Companies are therefore coming under pressure from two sides.

According to their annual reports, the Dax and MDax companies (excluding banks) had a total of 750 billion euros in financial debt at the end of 2022. A one percentage point increase in total interest would cost these companies 7.5 billion euros and depress profits accordingly. If one also assumes that the financing costs for all private investments increased by two percent compared to the previous year, the burden would be roughly 15 billion euros per year.

The construction sector was hit particularly hard, as the debt financing ratio for real estate is particularly high. After a decline of 1.7 percent in 2022, construction investments should also shrink in 2023 and 2024 according to the HRI forecast. The political goals for new residential construction and renovation of existing buildings are therefore likely to be clearly missed.

Last year only 295,300 apartments were built instead of the 400,000 announced by the federal government. The construction industry not only has to accept rising financing costs, but also significantly more expensive materials, increasing regulation and a shortage of staff.

In the coming years, the shortage of skilled workers is likely to become the dominant bottleneck factor in more and more industries. As society ages, far more workers retire each year than young workers enter the labor market. In addition, more and more school leavers have blatant educational deficits, so that they can only be used to a limited extent on the labor market.

“Germany is about to become the sick man of Europe again”

The Federal Employment Agency (BA) identified a bottleneck in 200 of the approximately 1,200 occupations assessed last year – 52 more than a year earlier. The jobs with the greatest bottleneck include nursing jobs, professional drivers, medical specialists, construction workers, child educators and vehicle technicians. A further 157 occupational categories are being monitored by the BA because they could quickly develop into bottleneck occupations.

“Germany is about to become the sick man of Europe again,” fears HRI President Rürup. The Federal Republic is now a high-tax country for companies, and the depreciation conditions are clearly outdated. In addition, large parts of the infrastructure are ailing, the population is facing a wave of retirement and the right energy transition absorbs resources without creating additional capacities for generating prosperity. Politicians would be well advised to accompany the decarbonization of the economy and society with a growth policy agenda, emphasizes Rürup. “Without economic growth, the energy transition will not be possible,” he warns.

More: Five theses on the geoeconomic aberrations of the West

source site-13