no upswing in Germany for the time being

Dusseldorf The worse the situation, the greater the hope for improvement seems to be – this is how the overall economic situation in Germany can be described at the moment. However, it is doubtful that this hope is really justified.

The joy was obviously premature when the Federal Statistical Office announced at the beginning of January that the economy had not contracted in the final quarter of 2022 as feared, but was likely to stagnate. In a first step, the office revised this value down to -0.2 percent and in a second step even down to -0.4 percent.

Based on this now noticeably lower starting level, economists surveyed by the financial data service provider Bloomberg expect a further decline in economic output of 0.4 percent on average for the current first quarter. Taken together, this results in a considerable minus, which can probably only be made up for in the first half of 2024.

Contrary to what some leading indicators may signal, there is no real improvement in sight. Inflation has so far remained close to the record values ​​of autumn and will fall from March, mainly because the respective comparative values ​​from the previous year are rising on the one hand and the price brakes financed with tax money on the other hand are improving the energy bills of many consumers.

Despite high wage demands from some trade unions, the chances for consumers to be able to quickly compensate for three years of real wage losses are slim. The bottom line is that most consumers should be happy at the end of the year if wage developments can at least keep pace with inflation in the current year – especially since many a long-term collective agreement dates back to times when inflation was low.

For example, employees in the printing industry will receive 1.5 percent more wages from May, in the textile industry there will also be 1.5 percent from October, newspaper editors will receive two percent from June, and in the insurance industry there will be two percent from September – the employees should be happy keep within limits.

In addition, the macroeconomic consequences of the turnaround in interest rates are only gradually having an impact. It is usually assumed that it will take around three to six quarters for this braking effect to take effect.

graphic

The severe slump in construction is probably only a foretaste: interest rates for overdraft and consumer loans are rising sharply, and the interest burden on the state is skyrocketing, which limits the scope for further relief.

In addition, credit-financed investments and interest payments on existing debt are becoming more expensive. In autumn 2022, the 150 listed companies in the Dax, MDax and SDax had piled up a good 530 billion euros in net financial debt – so every percentage point increase in interest rates on the average interest rate costs the corporations a good five billion euros. And the very high profits of many DAX companies in 2022 would also appear in a different light if they were adjusted for almost seven percent inflation.

graphic

The feared gas shortage did not materialize last winter. But German industry is by no means out of the woods. Despite the recent increases, industrial orders at the start of the year were 10.9 percent lower than a year ago; they were almost exactly at the level of February 2020, i.e. immediately before the Corona outbreak in Germany.

The same applies to industrial production, which increased surprisingly significantly this January, but whose level is still noticeably below that of the beginning of 2020.

>> Read here: Consumer sentiment at its highest level in a year
There is also limited hope that, as in past recessions, a recovery will be induced by rising foreign demand. The United States, Germany’s largest customer, is threatened with a recession due to the Federal Reserve’s aggressive interest rate policy, while the economies of the Netherlands and France are likely to grow only weakly in 2023. And China, which recently slipped to fourth place among the most important destination countries for German exports, is preparing for weaker growth rates in the medium term.

graphic

After only three percent growth in the previous year, the People’s Congress is assuming a five percent increase in the current year – compared to previous Chinese conditions, this almost seems like stagnation.

The German retail trade developed remarkably weakly at the beginning of the year. In real terms, sales fell by 0.3 percent compared to December. The December value was revised sharply upwards, so that only a minus of 1.7 percent is still recorded for this month. However, given rising prices, the trend is still pointing downwards – not a good sign for the development of private consumption.

>> Read here: Confirmed: Inflation rate remains at 8.7 percent – food is particularly expensive

One person’s suffering is often the other’s joy – calculations by the Ifo Institute show that numerous companies increased their sales prices in the fourth quarter of 2022 more than the development of purchase prices suggested.

graphic

In retail, hospitality and transport sectors in particular, as well as in construction, it was possible to increase profit margins – as consultants recommend. Management legend Hermann Simon advised companies last summer: “Increase prices faster! The price increases should not be below the inflation rate, but rather slightly above it. That also works easier in an inflation.” And so inflation is currently fueling itself.

graphic

Barring a miracle, the German economy will probably shrink slightly this year – that would be the sixth year-on-year decline since German reunification. Economists polled by Bloomberg are divided on this issue. The consensus estimate is zero point zero.

More: Why there will be no wage-price spiral.

source site-12