DIW: “Germany is on the brink of recession”

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Did the war in Ukraine mean the end of the successful economic model?

The biggest economic power of Europe “battles”. There are economists who believe that Germany is already on the brink of recession “with unfortunately no light at the end of the tunnel,” as Guido Baldi, an expert at the German Institute for Economic Research (DIW) believes, commenting on data from the Institute’s new economic barometer. “The Russian war in Ukraine and its far-reaching consequences are likely to lead to a loss of the country’s growth in 2022 and 2023, by around 5% of GDP.”

The price explosion is “poison”.

His colleagues share the same fear that the contraction in growth in the current quarter will continue into the spring of next year. In fact, the recession is likely to be more severe than in many other European countries, but not as much as in the first year of the pandemic when GDP shrank by more than 4%. Perhaps in the summer of 2023 there will be a climate change. The war in Ukraine drowned out the last hopes for recovery after the difficult years of the pandemic. “The war marks the end of the very successful German model which is schematically described as importing cheap Russian energy and intermediate goods, exporting high-quality products around the world and benefiting from globalisation,” said Carsten Brzeski, chief economist at ING. Nils Jansen, from the Institute for World Economics (IfW) in Kiel, points out that compared to the orders taken by the industry, it is in good shape and could significantly mitigate or even absorb the shocks. But “with rescue packages the government can only redistribute the burdens, not eliminate them,” adds Stefan Koch, head of the forecasting center at the Institute.

Booming energy prices are now affecting large parts of economic life and fueling inflation. Everything became more expensive. Shopping at the supermarket, refueling, eating at the restaurant. This stifles consumption, an important pillar of the economy. “High inflation reduces the willingness to buy, which means companies have less money to invest,” explains Marcel Fratcher, president of the DIW. “This could set in motion a downward spiral of weak economic performance for a year or two.” At the same time, energy price increases are weighing on businesses. Many have stopped producing certain goods because they are no longer profitable. Added to all this are the global supply chains that have been disrupted since the pandemic crisis. China’s zero-sum policy on the coronavirus, with multiple lockdowns this year, has repeatedly put supply chains under pressure. Materials and intermediate products are sometimes scarce and expensive. It is worth noting that all this has little effect on the labor market. “Despite political and economic uncertainties the labor market is resilient,” said Andrea Nales, president of the Federal Employment Agency, last April. Economists do not expect a significant increase in unemployment in the coming months either, because there is already a shortage of skilled workers and the state helps with short-term work benefits.

The German economy is “inventive”.

For the risk of a wave of bankruptcies, about which there has been so much talk, the case of the toilet paper manufacturer in Dusseldorf, Hakle, caused the bell to ring. The company went into receivership due to the sharp rise in raw material costs. At the beginning of September it was announced that it was headed for bankruptcy. But a wave of bankruptcies does not appear based on the data available so far. In the first half of the year, the Federal Statistical Service counted 7,113 corporate bankruptcies, 4% less than last year. According to the Association of Insolvency Administrators, it cannot be ruled out that the number of bankruptcies could increase by up to 40% in the next twelve months. “However, given the historically low base, this would not be a wave of bankruptcies, but a normalization of the numbers.” But the head of Commerzbank, Manfred Knopf, is not afraid of a wave of bankruptcies. From conversations with customers, he realizes “that of course they are worried and that we are facing difficult times, but there is no reason to panic,” he said in early September.

What are the longer-term prospects? Berenberg chief economist Holger Schmiding is convinced that despite the difficult period ahead “no recession lasts forever, this is a problem especially for the winter. As he argues there is a possibility of stabilization of the German economy again from the spring of 2023. “After that we expect growth again,” he said recently at the presentation of the economic forecasts of the chief economists of the private banks. “Structurally, the German economy is still very well supported,” believes Schmiding. “The advantage is often the ingenuity of SMEs.” Economists expect that after a decline in output in 2023 the German economy will grow overall again next year. By then, inflation should have fallen significantly. However, structural problems such as a lack of skilled workers, dependence on foreign raw materials and an aging society remain.

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