All those who had hoped for a similarly strong post-corona upswing this year as in the summer of the previous year were taught otherwise by the Federal Statistical Office last week. The German economy grew by only 1.8 percent in this summer quarter. Overall, economic growth of 2.5 to 2.7 percent should therefore be on the books for the full year 2021. Contrary to many expectations, the massive slump of the previous year would not have been made up for by a long way.
Quite a few economic experts are of the opinion that the boom they predicted has by no means been canceled, it has only been postponed. The Institute for the World Economy recently even predicted a good five percent growth for 2022. The experts from the Federal Ministry of Economics expect 4.1 percent and an overutilization of the overall economic production capacities for 2022, which – incidentally – would be a classic inflation driver.
Such a boom, in which backlogged production and failed consumption are made up for in a short period of time, is of course a possible scenario. However, it is questionable whether it is the most likely.
After all, we experience that the coronavirus is by no means defeated. There will probably be no further lockdown in Germany. But already now, at the beginning of the fourth wave, it is evident that many people avoid mass events in football stadiums, for example. And many Christmas markets will probably be much less crowded than in previous years. In addition, high inflation is noticeably reducing the purchasing power of consumers.
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It is also extremely uncertain whether the business with meetings and business travel will ever reach the pre-crisis level again. Video conferencing is well established, so many business hotels are seriously concerned. There is no real catching-up boom in this area.
It is much more likely than a rapid upswing that the German economy will have to live with a yo-yo economy for a few more quarters – a slump in autumn and winter, an upswing in spring and summer. The economic fluctuations will presumably gradually weaken until the economy finally grows again in the weakening trend, i.e. increases by an average of around 0.25 percent per quarter.
Probably the biggest problem of the German economy, which is heavy on industry and exports, is the massive disruption in global supply chains, especially the global shortage of semiconductors. On the one hand, due to China’s rigorous anti-corona policy, port closings lasting for weeks must be expected at any time. On the other hand, it will take many months before global chip production returns to normal.
Due to the very long production cycles, it will be a few more quarters before the usual quantities can be delivered again. In addition, the dependencies that have become apparent are likely to prompt manufacturers to increase their prices over the long term, which will drive up production costs.
In addition, the short-term increases in raw material prices and the necessary long-term climate protection efforts will noticeably increase the production and transport costs of almost all goods. This lowers the margins of manufacturers and dealers or – if it is passed on to the buyers – the purchasing power of the customers. A return to the growth path forecast before the pandemic is therefore by no means certain.
With every billion less economic output, the government and social security systems lack around 400 million euros in tax and premium income. If the future federal government does not want to bypass the debt brake and also forego tax and contribution increases, it must decide whether to use its scarce resources to modernize and digitize the capital stock, to save the global climate or to stabilize the social systems.
The political dispute over scarce tax resources is likely to be tough and fraught with conflict. Distinguishing what is important from what is desirable will therefore become the top priority of the new government.
Most of all, it is the strong rise in prices that is currently affecting the citizens; the HDE consumption barometer, which is calculated monthly by the Handelsblatt Research Institute, signals greater inflation concerns among consumers than ever since the start of the data series. Since inflation always hits the poorest hardest, the government is well advised to adjust all welfare benefits to the high inflation at the turn of the year.
The increase in Harz IV benefits and social assistance by 0.76 percent – i.e. three euros per month – still decided by the grand coalition, is difficult to convey in view of inflation of almost five percent, even if the adjustment is made later.
A federal government committed to climate protection should consider whether it would be wise to replace CO2-free nuclear power production with climate-damaging gas or even coal-based power generation. Six nuclear reactors are currently still running, three of which will be shut down this year and the rest by the end of 2022 after a comparatively short period of around 35 years.
By then, at the latest, Germany will become a net importer of electricity – and when it comes to avoiding a blackout, nobody will ask whether it is nuclear power from France or gas power from the Netherlands that will save the German grid from collapse. Sure, highly toxic waste is produced in nuclear power plants, but the repository problem has to be solved anyway. Additional quantities are hardly significant. And the chemical industry also produces toxic waste – and its existence has not yet been questioned.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the Advisory Council as well as an advisor to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
As desirable as a corporate tax reform is, it is clear that corporate tax cuts cannot be politically negotiated if there is no money for an income tax reform. Nevertheless, Germany threatens to fall further behind in the competition for internationally mobile investment capital.
Temporary declining balance depreciation has proven to be a lure for investments in the past – and has the advantage that it does not result in a permanent loss of income for the state. The tax shortfalls in the first time are offset by higher income at a later point in time.
In the future, of course, the depreciation tables should be thoroughly revised. Most of them date back to the last century, when machines were mostly made of steel and plastic as well as a robust and powerful motor. Today, however, many capital goods have a high proportion of software and semiconductors – with the result that the technology becomes obsolete much faster than that of traditional machines. More realistic depreciation periods would therefore be advisable for many capital goods.
Such an immediate program would strengthen Germany as a business location through a more secure energy supply and improve the CO2 balance. Urgently needed private investments would be stimulated by more appropriate depreciation rules, so that the German economy could get on a higher growth path.
Last but not least, those in need would be compensated for the current price hikes in many everyday goods. Without a noticeable increase in basic security, the substantial increase in the minimum wage announced by the SPD, Greens and FDP would widen the social gap even further. The disenchantment with politics of many who consider themselves socially deprived continues to increase. Such an immediate program would be expedient, comparatively inexpensive, socially just and climate-friendly. You couldn’t really ask for much more.
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