Germany's economy is stagnating. And these 5 charts show how
https://www.cnbc.com/2023/07/07/germanys-economy-is-stagnating-and-these-5-charts-show-how.html
- With Germany already in a technical recession, economists predict that GDP growth is set to stagnate for the rest of the year.
- While inflation may start to sink, Germany’s central bank estimates that it won’t reach 2% until at least 2025.
- Germany’s place in the euro zone means that its interest rates are determined by the European Central Bank, giving the country limited autonomy when it comes to tackling sticky inflation.
With Germany already in a technical recession, economists predict that GDP growth is set to stagnate for the rest of the year and have painted a gloomy picture for Europe’s largest economy.
In May, the German statistics office revised its first-quarter GDP readings from zero to -0.3%, which followed a 0.5% contraction in the last quarter of 2022.
But a faltering gross domestic product isn’t the only figure that suggests that the German economy is stuttering.
Here are five charts that show how the historical engine of Europe is faring.
High inflation
The consumer price index measures the average change in the price of goods and services purchased by consumers, and is a solid indication of monetary value trends.
Germany’s inflation rate is expected to hit 6.4% for June, according to provisional data from the German statistics office, which is an increase from the 6.1% recorded for May. Despite the projected increase, the figure is still a significant decrease from its near-50-year high of 8.8% in October, but remains well above the country’s 2% target.
“It looks like, for at least the next couple of months, inflation will stay on very high levels. Expect maybe for the second half that inflation might come down to a certain extent,” Joachim Nagel, president of Germany’s central bank, the Bundesbank, told CNBC in March.
While inflation may start to sink, Germany’s central bank estimates that it won’t reach 2% until at least 2025. German consumers have felt the impacts of long-lasting high inflation as they’ve had to make their euros stretch further, but the financial pressure on households doesn’t look set to ease any time soon.
Interest rates
Germany’s place in the euro zone means that its interest rates are determined by the European Central Bank, giving the country limited autonomy when it comes to tackling sticky inflation.
While the government can’t necessarily control inflation, it can mitigate the impact it has on the German population, Sylvain Broyer, chief EMEA economist at S&P Global Ratings told CNBC.
“What the fiscal authority can do in the face of high inflation is to alleviate the pain of inflation on the most fragile citizens,” he said.
The government introduced multiple relief packages in 2022, designed to help Germans cope with the rising cost of living brought about by high inflation, including increased child benefits and one-off payments for students and pensioners.
The European Central Bank has consistently raised rates since July 2022 as it attempts to bring down inflation across the region, and the main rate currently sits at 3.5% after a further 25-basis-point hike on June 15.
Energy prices
The current bout of inflation can largely be attributed to high global energy prices, which came as a result of pent-up pandemic demand followed by a post-pandemic recovery. Russia’s full-scale invasion of Ukraine then brought huge uncertainty to the market and caused a further spike in prices.
While some energy sources are starting to settle to their pre-war prices, the energy crisis is continuing to impact some of Germany’s biggest industries.
“Energy intensive industrial production is reduced substantially. The automobile sector [has also been] having difficulties for some time and substantial restructuring is still ahead,” Endowed Chair of Monetary Economics at Goethe University in Frankfurt, Volker Wieland, told CNBC.
Utilities costs are still expected to increase in 2023, according to a January report by Allianz. Electricity bills are expected to increase by around 35% this year, while industrial power prices are set to rise by around 75%, the report said.
Export figures
German exports unexpectedly nudged lower in May, coming to a total of 130.5 billion euros ($142 billion), which is a 0.1% drop compared to April, according to provisional data by the German statistics office. Analysts polled by Reuters had anticipated a 0.3% uptick month-on-month after April export figures surprised to the upside.
“The global interest rate hikes are naturally also dampening demand for products from Germany,” Veronika Grimm, professor of economics at Friedrich-Alexander-Universität Erlangen-Nürnberg, told CNBC.
But the fall in exports may not be as bad as the headline numbers suggest, S&P Global Ratings’ Broyer told CNBC, and he attributed the dip to a price effect reflecting factors such as the recent lower cost of energy.
“The foreign trade figures for May show that the terms of trade are continuing to recover. The German economy has already recouped half of the losses in terms of trade incurred over the last two years and the energy crisis,” he added.
China is Germany’s main business partner, with the countries having traded goods worth 298.9 billion euros between one another in 2022, and Germany has been buoyed by China’s much-hyped, post-pandemic re-opening.
But Europe’s biggest economy has shown hesitation in further strengthening its trading relationship with Beijing, with the country’s Economy Minister and Vice Chancellor Robert Habeck saying that while trade is open, Germany is not “a stupid market” and needs “to be careful.”
Aging population
Germany has the largest aging population in Europe, with a growing percentage of Germans in retirement, and that demographic is only set to grow in the coming decades.
The number of people at retirement age (67 years or older) will rise by roughly 4 million by the middle of the 2030s, according to the German statistics office, bringing the total number of retirees to at least 20 million.
The growing elderly population has exacerbated concerns about the country’s pension system, which is “on the verge of collapse” according to Rainer Dulger, president of the Confederation of German Employers’ Associations, who spoke to Germany’s Bild newspaper in October.
Contributions to Germany’s public pension plans are expected to represent 12.2% of the nation’s GDP by 2070 under the current system, according to The 2021 Ageing Report published by the European Commission. That’s a 2-percentage-point increase on the 2019 figure, and one of the highest forecasted changes in the European Economic Area.
Combined with a labor shortage crisis that has prompted the country to overhaul its immigration rules to bring in more workers, and enthusiastic engagement with digitalization to make the most of the workers it does have, Germany’s quickly-aging population is having ripple effects throughout the country’s economy.
