Germany: The Troubled Giant

The effects of the global pandemic are crystal clear – halt in business activities, decline in production and manufacturing activities, weak consumer demand, pressured oil price, among others –  as economies around the globe were badly hit, resulting in expectations of slowdown in global economic growth. For several economies, like Germany, with country-specific issues, COVID-19 created a big mess, one that might not be wiped off in the next few quarters.

The “German Machines” Are Getting Tired

2019 was no way different from 2018 for Germany as economic activities in the European nation was mute. Germany has significant exposure to tensions in global market, given its position as an exporting economy. Hence, the slowdown in economic activities in 2019 was largely due to weak global demand and under-performance of its automobile and chemical industries. In Q3:2019, Germany narrowly escaped a recession, growing grudgingly by only 0.1% (vs a reduction of 0.2% in Q2:2019). At the end of 2019, the largest economy in Europe registered a 0.6% growth in GDP, growing at the slowest pace since 2017. Notwithstanding, the 2019 figures marked the tenth consecutive annual growth, longest growth streak in the history of the country. With pressured global demand which dragged export earnings, its largest source of revenue, it was apparent that the 2019 growth was fueled by domestic consumption spending. Aside from weak global demand, the German automobile sales have not been encouraging as well, a ripple effect of the gradual transition into the production of ecofriendly vehicles. Hence, this reinforces the need for innovation and development of new products to match changing consumer taste. Interestingly, the government maintained a budget surplus for the eighth consecutive year. Merkel – led administration adheres strictly to a “Black Zero” policy which is targeted at ensuring that the country does not take on new debts, implying cautious government spending. Budget surplus in 2019 came in at USD 49.8 billion, printing circa 10% decline from USD 55.4 billion recorded in 2018, underscoring the need for government to shore up its spending to support drive for economic expansion. In addition, investment in machinery, equipment, and manufacturing plants are declining as one would expect – reinvestment shrinks when production and sales reduce.

Still no Alpha in Sight?

In the last quarter of 2019, there were expectations that 2020 would be a better year of the European giants. Firstly, the trade war between the US and China which largely affected trade and economic activities globally, thereby pressuring global demand, is over. Hence, one who naturally expect that the German economy would recover from its 2019 worries as global demand rebounds. Secondly, Merkel’s government commenced injecting funds into the stagnating economy in the latter part of 2019, in a bid to complement waning consumer spending. Also, 2020 was supposed to have more working days than 2019 – apparently, coronavirus has changed the narrative.

So far in 2020, the industrial giant of EU zone has been badly hit as a result of several factors in the global space, causing further pain for the economy. In January 2020, production activities nosedived, recording a huge decline of about 2.7% year-on-year, blame the total economic lockdown measure against the global pandemic. However, when the movement restrictions were eased, manufacturing activities recovered mildy as the contraction in the manufacturing sector improved to 1.9% in April 2020. Sadly, factory orders decreased significantly (-8.6%) in May as consumer purchasing power shrank, marking the biggest contraction in ten (10) years. Other sectors in the economy are not insulated from this economic crisis. For instance, the consumer goods sector took a hit as well, leading to 2.7% reduction in beer sales, a sign that households are re-balancing their basket of goods in line with limited resources.

The problems in the German economy are mostly international issues and effects of uncertainties around geopolitics among its immediate neighbours – Eurozone members. Hence, for a country like Germany that is largely export-driven, external shocks have paramount impacts on such economy’s affairs. Also, exports from Germany are dwindling, chiefly due to reduction in the demand for heavy machinery from China. The Chinese economy is a major buyer of German products, but has been battling with slower growth in recent times due to tariff imposed by the US. Unfortunately, worries about German exports may aggravate as US government consider possible tariffs on European cars which are largely produced in Germany.

Now that economic lockdown measures are off the shelf in Germany, one would think or naturally want to ask if the days ahead are bright for Germany. The answer is quite uncertain as the effect of the global pandemic lingers. For instance, most manufacturing companies in Germany are considering working for shorter work schedules – working for fewer days in a week, to ensure social distance directives are upheld. This development is a clear sign that outputs will move downwards in the coming months. Aside from its effect on production levels, this development will also cause unemployment rate, which hit 7.9% in December 2019 (vs. 3.4% in 2018), to surge in the interim. Considering all these factors, the country’s central bank revised its economic projection downwards, predicting that the economy would barely grow by 0.6% as against the previous forecast growth rate of 1.6%.

Rising above the Waters

Stating the obvious, Germany is the largest economy and exporter in Europe, implying that it has a significant impact on the economic well-being of the Eurozone, and definitely will not go down alone in the event these crises bite harder. While Olaf Scholz, the German Minister of Finance, still insists that the nation is not in a big mess as many believes, stating that most of the problems are not tied to the structure of the economy itself but “man-made” issues. For example, he cited partial agreement between US and China as a good indicator that bright days are here. Nothwithstanding, the fiscal and monetary authorities cannot just sit back and watch, hoping that activities in international space will fade off or self-correct. Although we have seen plans by the government to inject €130 billion as fiscal stimulus, there is the need to intensify government spending to stimulate business activities and lift waning consumer demand. Beyond that, Germany needs to look beyond exports by searching for alternative and innovative means to boost domestic consumption, and as well reduce its exposure to imbalances in the international space.

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