Germany, the biggest European economy shrank in the final three months of 2023, prompting economists and business leaders to call for an adrenaline shot to the country’s ailing industrial landscape.
GDP has contracted by 0.3% in the 2023-24 fourth quarter compared to the previous quarter, with the overall economy shrinking by 0.3% over the course of 2023, bogged down by persistent inflation, high energy prices and weak foreign demand.
In the second and third quarters, the GDP stagnated, helping the country to avoid another technical recession, as the phenomenon happens only when GDP contracts in two successive quarters.
Now, the Munich-based research institution IFO Institute has issued a forecast of the German GDP witnessing a 0.2% decline in the first quarter of 2024.
Troubles galore
The heads of four leading lobby groups have appealed to the German Chancellor Olaf Scholz for reforms to boost the attractiveness of Germany for industry, while also demanding cheaper electricity prices, investment in infrastructure and tax reform.
In January 2024, train drivers had their one week strike over working hours and conditions, along with salaries. The protesting workers want their duty hours to be reduced from 38 to 35 hours per week without a pay reduction, with their union GDL seeking a monthly raise of €555 for employees plus a one-time payment of up to €3,000 to counter inflation.
Also, bus and tram stations across 80 cities came to a standstill as public transport workers went on strike to press for improved working conditions and higher holiday entitlement. To make matters worse, the European giant’s flagship carrier Lufthansa’s ground staff walked off the job at five major airports. Their union called for a 12.5% pay raise or at least €500 more per month for nearly 25,000 employees.
Unions are pressing for higher wages and improved working conditions to help their members cope with the inflation that climbed recently as high as 8.8%. the strikes have resulted in the country losing an average of 17.8 working days per 1,000 employees between 2020 and 2022. In 2000, the same ratio was 12.6.
A one-day nationwide rail strike is costing the European giant economic output worth around 100 million euros ($107 million).
Commerzbank chief economist Joerg Kraemer estimates that the strike will reduce value creation in the transport sector by 30 million euros per day, which corresponds to 0.3% of daily gross domestic product.
The housing sector in crisis
Residential property prices in Germany dropped 10.2% in the 2023-24 third quarters, reflecting a grim picture for the sector.
“It was the fourth consecutive quarter of declines and the biggest since Germany’s statistics office began keeping records in the year 2000, underscoring the nation’s biggest property crisis in decades,” Reuters commented on the crisis.
The property sector in both Germany and Europe boomed in the low-interest rate regime, along with strong demand. However, as the global economy entered the inflation phase in 2022, rates too witnessed a sharp rise, resulting in an increase in borrowing costs, sending real estate developers into insolvency as bank financing dries up and deals freeze.
Demand for single- and two-family homes in major German cities has been declining since 2023, while apartment prices fell 9.1%. Orders for the construction industry too dropped a seasonally adjusted 6.3% in October 2023, with the German Construction Industry Federation warning that the sector was heading for a further reduction in jobs.
Germany’s Deutsche Pfandbriefbank AG is one of the victims of the real estate woes, as its bonds slumped on concern about its exposure to the sector.
The bank had to respond by issuing an unscheduled statement about its increasing provisions because of the “persistent weakness of the real estate markets.”
It described the current turmoil as the “greatest real estate crisis since the financial crisis.” Lenders are taking increasing provisions on debt extended to property owners and developers as loans are souring due to the rising interest rates, which have eroded the value of buildings around the world. The bank also warned about refinancing posing the greatest risk to the struggling sector as asset values suffer.
Aareal Bank AG bonds lost about 10 points, as they got quoted at 76 cents on the euro. In the first half of 2023, the major state banks, Helaba, BayernLB, LBBW and NordLB, posted provisions of about €400 million in total.
If the commercial real estate losses spread to Europe through smaller German banks, the situation would look like one generated by the 2008 global financial crisis. Germany’s central bank, Deutsche Bundesbank, has already warned about the risks surrounding commercial real estate, saying there could be “significant adjustments” leading to higher defaults and credit losses.
Can the situation be salvaged?
In 2023, the country’s constitutional court ruled against a plan that allowed money intended for COVID emergency measures to be spent on the transition to a carbon net zero economy. That resulted in a €60 billion (£52 billion) budget hole, which had to be filled by austerity measures.
Germany became Europe’s economic giant due to its strong manufacturing base. Also joining the euro at a competitive exchange rate and securing supplies of cheap Russian energy helped the country to boost its corporate profits and generate trade surplus.
Berlin was the key lecturer during the 2009-10 ‘European Debt Crisis’, also known as ‘Eurozone Crisis’. Countries were asked to follow Germany’s example and make themselves leaner and more competitive.
However, the undoing of the Scholz government has resulted in the European nation squandering its advantageous position. Now its smaller peers like Portugal, Italy and Spain are sparing the Eurozone from tipping into a recession.
Peter Bofinger, professor of economics at Würzburg University, said the German economy has structural problems, and what was once considered the strengths of the country’s business model have now become its weaknesses.
“Germany is much more export-focused than other developed nations, manufacturing accounts for a bigger share of the economy and the car sector became too reliant on China and has been slow to adapt to the growing demand for electric vehicles. The German economy is facing a fundamental challenge to its business model that cannot be addressed by removing regulations and cutting taxes,” Bofinger stated in his opinion piece for Social Europe, while adding, “Germany has become sick. But it could be cured if it were willing to change its lifestyle and take the medicine needed to regain its health.”
“The medicine is public debt deployed as an engine of growth – not by reducing taxes and accompanying transfers but by increasing public investment to stimulate domestic demand and the emergence and deployment of new technologies,” Bofinger noted.
Holger Schmieding, economist at Berenberg Bank, sounded upbeat about the prospects of the German economy bouncing back, given its strong labour market and a fiscal position enviable for other advanced economies. The economy has stagnated, as per Schmieding, due to China’s economic slowdown and Germany’s decision to wean itself off cheap Russian energy since the 2022 Ukraine war.
“Germany is very dependent on global trade. When global trade is booming everybody marvels at how well Germany is doing. When global trade is weak Germany becomes the sick man of Europe,” Schmieding added.
Timo Wollmershäuser, head of forecasting at the IFO Institute, said, “Germany has become noticeably less competitive as a business location in recent years. In addition to higher energy costs, a number of other factors have contributed to this: an unchanged high tax burden, increasing bureaucratic costs, sluggish progress in digitalisation and a growing shortage of skilled workers.”
Carsten Brzeski, global head of macro at ING bank, said that Germany was facing similar problems to other European economies, caused by higher interest rates and the Ukraine war. However, Berlin is dealing with “additional issues of its own” that will take time to solve and “will require Germany’s companies to adapt in order to survive.”
Brzeski dubbed the problems as more of “structural issues” harming the German economy. As we end the discussion here, the question remains, does Chancellor Scholz mull a structural overhaul of the German economy? That won’t be a bad move either.