Germany’s economy stumbles, once again making it the “sick man of Europe”
Germany’s economy stumbles, once again making it the “sick man of Europe”
New figures suggest Germany could already be in recession, as business activity contracted for a fourth straight month in October. Experts are labeling Europe’s largest economy the “sick man of Europe.” The International Monetary Fund expects the country to be the only advanced economy to shrink this year, with a forecasted contraction of 0.3%.
The “sick man of Europe” is a label European countries try to avoid.
Nearly every major European country has held the title at some point in time. And it seems like it’s Germany’s turn to take it up again, having been labeled the “sick man” in the late ’90s when the country’s growth was stagnant.
“The German economy is still slightly below the 2019 level — that is, the economic activity before the crisis, compared to that of all other G7 countries are now above that level,” said Clemens Fuest, president of the Ifo Institute, an economic think tank in Munich.
According to the Ifo’s Business Climate Index, businesses in Germany have a bleak outlook towards the economy.
The reason, Fuest said, is based on short-term and long-term indicators.
In the short term, “Germany is very much affected by the Russian attack on Ukraine by rising energy prices,” he said. “The German economy is very exposed to Eastern Europe and all Eastern European countries are affected by this war.”
And in the long term, businesses are worried about threats to some of its strongest industries.
“Germany’s most important sector is the automotive sector, and the automotive sector is in the process of restructuring towards electric mobility,” Fuest said. “And that is challenging for the German companies as for all companies, but the German companies were world leaders in cars with combustion engines and now they have to adjust.”
Meanwhile, Germany’s construction sector is experiencing its biggest slump in activity for years. The Social Democratic Party’s winning election campaign two years ago included a pledge to add 400,000 new homes to the country’s housing stock each year. That goal has been missed by hundreds of thousands.
Dirk Salewski is president of the German House Building Federation and CEO of a company that builds houses and apartments explained some of the hurdles the industry has been facing: “First the corona pandemic and of course the war and massively higher prices for everything we need for building — especially steel for example, was 400%. More money than before.”
Interest rate hikes have also made borrowing impossible for many businesses, he said.
“We came from 0% to 1% and now we are at 4% to 5% for loans, so people can’t afford anymore this high costs for building,” said Salewski.
The problem is, per Clement Fuest from the Ifo Institute, these increases are likely here to stay — even after the war.
“Cheap imports of gas from Russia [are] over for good or at least for a long time, and that means that there is more basic restructuring going on in the German economy. And that, against the backdrop of declining working age population, that is challenging,” he said.
Which means that for the “sick man of Europe,” this might be an illness that needs to run its course.
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