The construction industry is likely to slump more this year than it has in 20 years.
(Photo: dpa)
Dusseldorf The German economy is growing again – at least a little. Economic output fell by 0.4 percent in the final quarter of 2022 and economists surveyed by the data service provider Bloomberg assume on average that the German economy may have shrunk by 0.2 percent in the first quarter. But for the current second quarter, they expect an average of 0.2 percent growth – a ray of hope after all.
The purchasing manager indices for Germany published on Friday confirm these expectations. The “HCOB Flash Germany Composite PMI” increased further to 53.9 points thanks to the flourishing business of the service providers – values above 50 indicate growth.
The main reason for this cautious optimism is likely to be the easing in energy prices and the signs of recovery in industry. According to the latest data for February, industrial production rose by two percent compared to the previous month – but was still around eight percent below the record values of spring 2018.
Export-oriented German industry should initially continue to benefit from China’s economic recovery. Economic output in China increased by 2.2 percent in the first quarter compared to the previous quarter.
According to the usual reading in the USA, this would correspond to a rate of around nine percent extrapolated for the year as a whole. For comparison: the US economy is likely to have grown at a rate of a good two percent at the start of the year.
Turnaround in interest rates weighs on the economy
In Germany, on the other hand, the joy about the return of economic growth in the spring could be short-lived. From the summer, the effects of the sharp turnaround in interest rates by the European Central Bank (ECB) should be felt in more and more areas.
>> Read here: Why the upswing in Germany is not coming this year
The building usually reacts first. In 2022, for example, construction investments fell by 1.7 percent compared to the previous year, and the Handelsblatt Research Institute (HRI) expects a further decline of around five percent for the current year – this would be the sharpest slump in over 20 years.
But almost all sectors will be affected by the turnaround in interest rates. On the one hand, companies have to accept significantly poorer conditions when refinancing old debts, which puts pressure on their profits.
>> Read here: New family business president: “We need a different policy for Germany”
On the other hand, credit-financed investments may become so expensive that they become unprofitable and are therefore not made at all. Such a macroeconomic investment weakness would then radiate to equipment suppliers, for example in mechanical engineering, since demand is falling.
Consumers keep their money together
Private consumption is usually also affected by higher interest rates. Rising interest rates for overdraft and consumer credit reduce the consumption options and may make a new car, a new kitchen or the modernization of your own home prohibitively expensive. According to FMH-Finanzberatung, the average overdraft interest was still around nine percent last spring, but the banks are now charging more than eleven percent on average.
In addition, most state energy aid consisted of one-off payments or temporary price reductions. This soothing effect is now significantly reduced.
Many consumers will therefore only gradually become aware of the full extent of their real loss of income. In addition, in view of the energy turnaround aimed at by the government, many consumers have justified concerns that housing costs will continue to rise – and that consumers will therefore have to forego consumption elsewhere. Private consumption will therefore probably stagnate at best in the current year.
The most recent turbulence in the banking sector could prompt the major central banks to act a little more cautiously over the course of the year – i.e. to raise interest rates less than would be advisable in view of the persistently high inflation. More concern for financial stability means that the risk of another recession falls at the price that the fight against inflation loses momentum.
Inflation is likely to fall more slowly than hoped
Inflation rates are therefore likely to decline more slowly than recently hoped. At the end of this year, the HRI expects inflation in Germany to be around four percent.
It is questionable whether and when it will fall back to the ECB target of around two percent on a permanent basis. The imported inflation resulting from high energy prices has now become a self-sustaining “domestic inflation”, as recently described by ECB President Christine Lagarde.
The often feared wage-price spiral has mutated into a price-wage spiral. Apparently quite a few manufacturers, dealers and service providers have used the recent surge in prices to improve their margins. As the ECB blog post put it bluntly, “The impact of corporate earnings on domestic price pressures is exceptional from a historical perspective.”
The great majority of dependently employed consumers and pensioners are left behind. Three years of real wage losses could be followed by a fourth in 2023.
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