Dusseldorf The positive image of the German economy is misleading. Contrary to what the federal government often suggests, the German economy has by no means come through the pandemic particularly well. It was not until the third quarter of 2022 that economic output returned to the pre-corona level – later than in almost any other European country.
For comparison: the gross domestic product (GDP) of the EU was 2.7 percent higher in the third quarter than before the pandemic, in France by 1.1 percent and in Italy by 1.8 percent.
And the joy about the now closed corona gap was short-lived. According to data that has now been revised, German economic output shrank again in the fourth quarter of 2022. While the euro zone as a whole still managed to achieve mini-growth, German economic output fell by 0.2 percent.
The differences become even more serious when looking at the year 2022 as a whole. While politicians in Germany celebrated growth of 1.8 percent, the economy in the euro zone grew by 3.5 percent in the same period, i.e. almost twice as much.
No improvement is in sight for the near future. On the contrary: Economists surveyed by the financial data service provider Bloomberg expect a minus of 0.4 percent for Germany in the first quarter. Fears of a technical recession would become reality. Because only slight growth is to be expected after that, German GDP is not likely to reach the level of summer 2022 again until the end of 2023 – and thus also the pre-Corona level. In other words: Germany would then be missing four years of economic growth.
Sentiment indicators are pointing up
It is all the more remarkable that the mood indicators for the German economy are pointing upwards. The Ifo business climate improved for the fourth time in a row, the ZEW economic expectations are in positive territory for the first time since February 2022 and consumer sentiment has reached the level of the outbreak of the Ukraine war, as figures on the HDE consumer climate show.
At the same time, the hard facts speak a different language. Despite the substantial backlog of orders, production in December fell by 3.1 percent compared to the previous month – and thus significantly more than expected. Business collapsed in construction in particular, where production fell by eight percent. Mortgage financiers are currently talking about the sharpest slump of all time.
Retail sales also collapsed in December. In the Christmas month, retailers made real calendar and seasonally adjusted 5.3 percent less sales than in the previous month, compared to the same month last year, real sales were even 6.4 percent lower. Consumers are obviously trying to keep their money together.
Record inflation of 7.9 percent last year caused real wages to fall 4.1 percent from a year earlier. After three years of declines in a row, the real purchasing power of employees is as high today – more correctly: as low – as it was in 2014. Employees are therefore missing eight (!) years of gains in prosperity.
In view of the record profits of numerous DAX companies, there are many indications that employees and the state in particular have so far borne the financial consequences of the energy crisis.
Tariff rounds are likely to be tough
The collective bargaining rounds for eleven million employees that are due later in the year are therefore likely to be tough. The Verdi trade union is demanding a 10.5 percent wage increase for the 2.8 million employees in the federal and municipal public sector. For the 160,000 postal employees, the union is even asking for an increase of 15 percent, and the EVG wants to achieve a 12 percent increase in income for the railway workers.
As expected, the employers rejected the claims as far too high. But the unions reacted with strikes, for example in local transport and at the airports.
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The extent to which Germany as a location could tolerate strong wage increases is controversial. On the one hand, the economic development is uncertain and is likely to be significantly influenced by further developments in the Ukraine war and the situation on the energy markets. Experts such as network agency boss Klaus Müller warn of a persistent gas shortage that “the possibly harsher winter is next”.
On the other hand, world trade, led by China, seems to be recovering noticeably from the consequences of the pandemic and war – and in the past, German industry, which is strong in exports, was always one of the top beneficiaries of an improving global economy.
The German domestic economy, on the other hand, is likely to continue to be influenced by sharp falls in real incomes for the time being. At the latest when the comprehensive state aid has been paid out and spent and no new aid packages follow, the loss of income will become obvious to the Germans. In the current year alone, the real loss of purchasing power is likely to add up to a good 100 billion euros, of which government aid is likely to offset around 50 billion euros and the energy price brakes around 20 billion euros.
Given the consumer spending of private households in the order of two trillion euros, the remaining losses of roughly 30 billion seem manageable. At the same time, real tailwind for the fragile economy from private consumption cannot be expected.
Even if the whole of 2023 were to pass without any nasty surprises, the national accounts might end up in the black at the end of the year – at best. Because it is still by no means certain that a recession will not materialise. On average, the economists surveyed by Bloomberg still expect a minus of 0.2 percent. That would be the sixth decline in economic output in reunified Germany for the year.
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