Germany is standing still

War and crises have weakened economies worldwide - especially those of industrialized nations. While Europe and the USA are slowly recovering, Germany is lagging behind. After the recession in 2023, the federal government and economists expect slight growth in 2024, but the economists at German banks are less optimistic.


The government called it a special fund, the judges from the Karlsruhe Federal Constitutional Court called it debt - and depending on the calculation, between 13 and 28 billion euros were suddenly missing from the federal budget for 2024 in November of last year. When Olaf Scholz, Robert Habeck and Christian Lindner joined in mid-December When they appeared in front of the cameras about an agreement and their plan for a new budget, it was not only the media and the opposition who followed the statement with interest. The country's economists also listened carefully to what was agreed upon. The budget plans of the Chancellor, the Economics Minister and the Finance Minister also influence how quickly or slowly the German economy struggles out of stagnation. Experts from the Kiel Institute for the World Economy (IfW), for example, assume that the budget crisis, even if it has been resolved for the time being, will push gross domestic product down this year. Part of the assumption is that government spending usually triggers further private investment. Every euro that was intended for subsidies and is not spent reduces economic activity by almost half a euro. As a result, according to the IfW analysis, economic output will only grow by 0.9 percent in 2024 instead of 1.2 percent.  


Banks believe recession is likely 


This forecast, like that of the federal government - it expects 1.3 percent growth for 2024 - is one of the most optimistic. A survey by Creditreform magazine among the chief economists of German banks shows: The experts make qualitatively similar assumptions, but set lower quantitative estimates. “We are cautious because massive interest rate increases by central banks in economic history have usually ended in at least a mild recession. “Many people are now using the budget crisis as an opportunity to lower their already overly optimistic growth forecasts,” says Jörg Krämer, chief economist at Commerzbank. His institute expects a GDP decline of 0.3 percent for 2024.  


“With little stimulus from outside and the austerity policy to be expected as a result of the Karlsruhe ruling, the German economy will remain caught between recession and stagnation in 2024,” says Carsten Brzeski, chief economist at ING-Diba. Expressed in numbers: minus 0.3 percent GDP growth in ING's forecast. The problem is that the government does not sufficiently reflect structural changes in the economy in its models, adds Brzeski. “Another point is private consumption. Here, the more optimistic forecasts assume that rising real wages will lead to more consumption in 2024.” Brzeski expects consumers to remain cautious due to high uncertainty and increased interest rates. The Handelsblatt Research Institute (HRI) also expects this. It is assumed that private consumption, which contributes around half of gross domestic product, will recover moderately in the coming years. The 2019 level will be reached by 2025, according to the HRI's winter forecast. “There has never been such a long period of time without an increase in consumption in German post-war history. Real wages have been rising slowly again since the second quarter of 2023. In addition, there is a price increase of almost 20 percent within four years.” For comparison: An evaluation by the Hans Böckler Foundation of the collective agreements for a good 14.8 million employees showed that wages will rise by an average of 5.6 percent in 2023 rose, while inflation was at just over 6 percent. Inflation was only exceeded in 2023 when tax-exempt one-off payments from many employers were taken into account.  


From the perspective of banking economists, the downward economic risks currently appear to outweigh the opportunities. The BVR has also revised its growth estimate downwards to 0.0 percent due to recent developments. “The overall economic stagnation is likely to continue in the first half of 2024, not least because of the burdens caused by the budget crisis and the Middle East conflict,” writes BVR chief economist Andreas Bley in his current analysis.  

Worried about Germany as a location?


Only DZ Bank, KfW and the German Savings Banks and Giro Association (DSGV) believe in weak economic growth in 2024. “Energy prices will rotate at a significantly lower level,” says Michael Holstein, chief economist at DZ Bank. “The easing price pressure, together with rising wage developments, is opening up more scope for private consumption, which is likely to be the mainstay of the slight economic recovery.” Fritzi Köhler-Geib, chief economist at KfW, justifies her assumption with “stable employment, rising nominal wages and a “significantly declining inflation”. She explains the wide range of forecasts by “very different expectations regarding the development of equipment investments and industrial production. The current discussions about Germany as an industrial location are particularly reflected here.”  


The KfW, for example, assumes that corporate investments will increase again because the need for energy transition, climate neutrality and digitalization is urgently high and investments in these areas will now be “intensified again now that capital goods manufacturers are able to deliver sufficiently again following the elimination of value chain disruptions.” said Köhler-Geib. Others, such as the chief economist at Deutsche Bank, Stefan Schneider, see the energy transition and weaker globalization as more structural challenges, “the short and medium-term effects of which on the economy are difficult to estimate.” Michael Holstein points out that the wars in Ukraine and between Israel and Hamas pose a risk of crude oil becoming more expensive - with corresponding effects on inflation and economic growth. BVR chief economist Andreas Bley therefore still sees companies' willingness to invest as low, "in view of the initially still high interest rates and the only slowly disappearing uncertainties about the government framework conditions".


Inflation and interest rate developments  


All economists agree that a lot will depend on how inflation and the financial markets develop. Nobody expects inflation to be as high as in 2023; all signs point to recovery. “If you ignore the volatile prices for energy and food, inflation is likely to settle at 3 percent in the end because of the sharp rise in wages rather than the 2 percent targeted by the ECB,” says Jörg Krämer. On average, the institutes expect inflation to be between 2.5 and 3.0 percent in 2024. Stefan Schneider assumes that it could even approach the ECB's target at the beginning of 2025. He expects the ECB to cut interest rates in April, earlier than the US Federal Reserve in June.  


If things happen as predicted, financing conditions are likely to improve somewhat again. Nevertheless, after the recent “interest rate increases by the ECB and the other western central banks, there is a completely new interest rate regime that companies will first have to get used to,” warns Krämer. Reinhold Rickes, chief economist at the German Savings Banks and Giro Association (DSGV), agrees: “The change in interest rates was necessary and right in view of the peak inflation - but the interest rate rudder that was turned around after years of low and even negative interest rates is a historically unique experiment.” Therefore, leave it alone It is also not yet possible to fully assess what consequences the four years of stagnation and the interest rate turnaround will have on the bottom line. According to him, an important factor for resilience for 2024 is whether and how companies face the challenges in Germany - and how politics supports them in doing so. “Entrepreneurs need more freedom to develop their economic activity. It is important to pick up the pace when it comes to energy, digitalization and an expanded workforce through flexibilization, education and immigration,” demands Rickes.  


According to Carsten Brzeski, “Interest rate dependency and the extent of structural transformations of a sector or company are the strongest drivers of possible insolvencies. Although the institutes do not fear a major wave of insolvencies, they are keeping a close eye on their corporate customers. “Companies that have good profitability, can pass on increasing costs to customers and have a diversified and spread-out financing profile with a high proportion of fixed-interest liabilities are likely to be particularly resilient,” says Stefan Schneider. Fritzi Köhler-Geib also believes that those who have already shown during the corona pandemic that they can react quickly to changes have an advantage. “The ability to innovate and implement digitalization projects for crisis resilience will also play a central role in overcoming future crises.” 



Source: “Creditreform” magazine / Text: Christian Raschke

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