Contraction confirmed for German economy with no recovery in sight
The growth slowdown was led by a sharp fall in investment, which fell by more than 2.0 per cent in the quarter.
Germany’s travails look set to continue with a clutch of figures revealing the challenges facing Europe’s one-time economic powerhouse.
New data out today confirmed that the eurozone’s largest economy contracted by 0.1 per cent between April and June, more or less reversing the modest growth Germany generated in the first quarter.
The growth slowdown was led by a sharp fall in investment, which fell by more than 2.0 per cent in the quarter. The manufacturing sector suffered in particular, with investment in machinery and equipment dropping by 4.1 per cent
Germany’s trade position also worsened slightly, with exports falling 0.2 per cent due to weakness in goods trade.
Leading indicators suggest no recovery is in sight. Last week’s purchasing managers’ index (PMI) fell to a five month low driven by another deterioration in the manufacturing sector.
The survey also showed business confidence fell to the lowest level since the start of the year. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the survey was “a real mess.”
There was more bad news yesterday. The Ifo index, Germany’s most prominent business survey, dropped for a fourth consecutive month, again driven by declines in manufacturing.
“The German economy is currently back where it was a year ago: stuck in stagnation as the growth laggard of the entire eurozone,” Carsten Brzeski, global head of macro at ING, said.
The German economy has struggled to get back onto its feet after the overlapping shocks of the pandemic, the war in Ukraine and the energy shock. According to the IMF, GDP per head declined by one per cent between 2019 and 2023 putting it among the worst performing high-income countries.
Economists had expected things to improve over the second half of the year as German households felt the benefit from large real wage increases. Negotiated wages rose at a startling 6.2 per cent in the first quarter of the year and rose at a still healthy 3.1 per cent in the second.
However, GfK’s latest consumer confidence index for September, also released today, slid to -22.0 suggesting this won’t necessarily translate into stronger spending.
And whatever the direction of consumer spending, structural issues with Germany’s manufacturing sector will still persist.
German manufacturing accounts for around 20 per cent of gross value added compared to around 10 per cent in the US, UK and France. But many manufacturing firms were hit very hard by the huge increases in energy prices in the wake of the war in Ukraine.
Franziska Palmas, senior Europe economist at Capital Economics said some production capacity had been “permanently lost” due to the energy crisis.
“With gas prices in Europe still around six times higher than in the US, the sector is much less competitive than before the pandemic,” she said. “The sector will remain in structural decline”.
There are a number of other broader structural changes which will limit the extent of Germany’s possible recovery, in particular its exposure to an increasingly fragmented geopolitical landscape.
China has been Germany’s largest trade partner for the last eight years, but tensions between the EU and China – particularly relating to EVs – will almost certainly dent trade.
“The fact of the matter is that the German economy is currently learning the hard way what it means to be in the middle of cyclical headwinds and structural changes,” Brzeski said.
