Is Germany the new sick man of Europe?

9th October 2023
-IAM, News

Hugues Chevalier, Economist

The main German economic research institutes have published their half-yearly forecasts, and they are not brilliant. The continuing deterioration in the international economy, particularly in several major export markets (China, South Korea, etc.), continues to weaken German industry. Furthermore, German industry, which had been badly affected by the sharp rise in energy prices, did not see its production recover with the fall in gas prices. In the chemicals sector, for example, production is still 20% below its pre-energy crisis level, due to massive relocations to countries where energy prices are lower. According to an August survey by the Chamber of Commerce and Industry, almost 32% of industries were planning to relocate or had already done so. The automotive sector, meanwhile, is facing considerable delays in electrification. Finally, the construction sector is at a low following the rise in interest rates in recent months. This gloom should result in a contraction in GDP this year of between 0.4% (IFO forecast) and 0.6% (RWI Essen forecast). To support the economy, the government is proposing to subsidise electricity for businesses at a cost of €30 billion between now and 2030 in order to curb relocations. But this needs to be approved by Brussels and is not unanimously supported across Germany (why favour one sector over another?). Other less costly proposals (7 billion) in the context of the “debt brake” concern improving the country’s competitiveness. In any case, the only hope for improvement in the short term is household consumption, which should remain buoyant thanks to the substantial pay rises obtained by the unions and the fall in inflation to 2% by 2024.