News Analysis: Why is German economy losing steam?

Frankfurt, Germany | Xinhua | Germany’s economy, the largest in the European Union (EU), stagnated in the second quarter of 2023 with zero growth, according to Eurostat, the statistical office of the EU.

The International Monetary Fund (IMF) has recently revised its forecast for the German economy in 2023 down to a contraction of 0.3 percent.

The worsening of business sentiment is ubiquitous in all four industries covered by the closely watched ifo Business Climate Index in Germany (manufacturing, service, trade and construction), the ifo Institute said.

The index fell for the third consecutive month in July.

High energy prices, the European Central Bank’s (ECB) rate hikes, as well as weak global demand and the uncertain global economic outlook are all weighing on the German economy, according to a recent IMF report.

German chemical giant BASF has said that its additional energy costs totaled 3.2 billion euros (3.5 billion U.S. dollars) in 2022.

The rise in energy prices has thrown profitability of German industries into question. As a result, BASF decided to wind down some of its plants in Germany.

BASF is not alone in scaling back operation on their home turf. An increasing number of German companies are moving their production or investment to countries where energy costs are relatively low.

The cycle of rate hikes by the ECB has added to the difficulties of the German economy by pushing borrowing costs much higher.

Furthermore, the combination of high inflation and tightened lending standards is dampening consumption and hurting willingness to invest.

According to an ifo analysis, consumption in Germany is likely to shrink by 1.7 percent in 2023 due to the dwindling purchasing power of households at a time when core inflation remains persistently high.

While price hikes and other external factors may be temporary, the entrenched structural problems are set to pose a far more serious challenge for the German economy, once considered the engine of the EU but now appearing to be losing steam.

In a recent report, the German DZ Bank said a shortage of skilled workers, red tape, slow digital technology development and an aging population are putting the German economy at a disadvantage.

Germany is in dire need of a structural reform in the long term to prevent stagnation evolving into a lingering economic weakness, the German newspaper Handelsblatt commented.

“Politicians are slowly realizing that we are not talking about flourishing landscapes and a new economic miracle, but about a crisis situation in the German economy,” said Siegfried Russwurm, president of the Federation of German Industries.

Russwurm said the pressure of suffering may not yet be great enough, adding that “it looks like things have to get worse for the necessary jolt to happen, and then get better again.” (1 euro = 1.10 U.S. dollars) ■