How can both be true at the same time? The German economy is weak – and the situation does not look like it will improve any time soon. Of particular concern are the announcements by companies in the country’s leading industrial sectors, such as the automotive industry or the steel industry, that they will cut thousands of jobs or even close some factories completely.

At the end of November, the employment barometer of the Munich Ifo Institute fell to 93.4 points, from 93.6 points where it stood in October. More and more companies are avoiding hiring and laying off workers, as Ifo researcher Klaus Vollrabe explains: “Industry is trying to cope with the crisis with reduced hours and job cuts.”

The German economy is at a standstill

So is the pressure on the labor market just a result of weak economic activity – or are there other reasons? And furthermore: is the loss of jobs an obstacle on the way to a new economic growth – or can this trend contribute to the improvement of the situation?

In any case, an increase in the number of unemployed cannot lead to more growth: tax revenues decrease and government spending increases. Mark Sattenberg, an economist at Deutsche Bank Research, writes that “the current economic weakness is becoming increasingly evident in the labor market as well, while the resulting anxiety threatens to weigh on consumer sentiment.”

According to Dominik Grohl, a labor market expert at the Kiel Institute for the World Economy (IfW), the number of unemployed is “symptomatic of a much wider development. Unemployment has already been rising for two years, with the economy stagnant’ – and growth is getting slower and slower. Thus, Germany’s growth remains close to zero – and there is no sign of an improvement in the situation.

No light at the end of the tunnel

There is still no light at the end of the tunnel in the Ifo Institute’s monthly business climate index for November, with business sentiment turning increasingly negative – which economists say is due “primarily to a worsening assessment of the current situation ”, which had the effect of further limiting expectations.

At the same time, the foreign trade situation remains bad, a fact that is particularly burdensome for an economy as dependent on exports as Germany’s. “Most of all, the mining industry is affected, whose exports are expected to decrease significantly. The automotive industry also expects a decrease in exports, although not as significant as that of the previous month. A slight negative trend has been observed for months in mechanical engineering as well,” says the Institute’s report.

A German problem

Why do conditions look so bleak in the German economy? Many link the problem to the state of the global economy. Grohl, on the other hand, believes that “this is a problem that specifically has to do with Germany. In many other countries things are better. External factors, such as European interest rate policy or the international environment, may be affecting conditions negatively, but these cannot be the sole explanation for Germany doing so badly.”

Ralf Zollveen from Commerzbank’s economic research department focuses more on general external conditions: “Initially, the bad situation is a consequence of unfavorable economic activity, that is, of weak demand both from home and abroad.” And he points out to DW that there are also reasons that are exclusively related to Germany, such as “high energy costs, labor costs that have increased significantly recently, as well as excessive bureaucracy, factors that make Germany an unattractive place for investment.” .

The labor market is in crisis

Some are optimistic that the growing number of layoffs can help address the shortage of skilled workers. According to Zollveen, however, this is not the case, since, among other things, “skilled workers are also being laid off”. But beyond that, such job cuts often occur in industry, while vacancies exist more in the service sector, where other skills are required.

Speaking to DW about hiring skilled workers, Tom Krebs, professor of economics at the University of Mannheim, suggests taking some more specific measures, such as extending the hours schools can keep students. In this way, many mothers with children who are required to work only occasionally or a few hours a day will be able to work more.

Another idea is training within the business context. Thus, workers will acquire new skills, without having to be fired and replaced.
However, in cases like Volkswagen’s, the downward spiral of business is not due to the mistakes of the employees, but to the management failures of the company. That is why “the entire board of directors of Volkswagen should be changed first, before the company decides to close factories.”

How can Germany become attractive again?

Grohl from the IfW underlines that “since the weaknesses are primarily observed in industry and not in the service sector, there must be talk of a structural crisis”. The expert cites competition from the Far East as an example: “The business models that have been profitable for the industry for decades are under pressure – not least because China, for example, is now able to manufacture on its own the machines that previously imported from Germany’.

This structural crisis can be tackled with political interventions to make Germany attractive again – for example “by lowering taxes or cutting red tape”.

Zollveen of Commerzbank seems to agree with this. As he tells DW, “the most important thing is to make Germany more attractive as a location for investment again.” And for that to happen, red tape will have to be “reduced, as well as energy and labor costs. The latter also includes salary costs, but also social contributions that threaten to show an even greater increase in the coming years.”

Edited by: Giorgos Passas