October 30, 2020

The economic slowdown virus infects Germany | Economy

The economic slowdown virus infects Germany | Economy

This great commercial door that connects Germany and Europe with the rest of the world is the living image of the German model: an economy open to the outside world, where exports account for almost half of GDP. That figure has not stopped growing in four decades. And that hyper-openness to the global market is what has allowed Germany enviable growth for almost a decade while other neighboring economies faltered.

But its exposure to the outside world now runs the risk of becoming weak in times of strong volatility like the current one, in which the predictions speak of an economic slowdown, also in Germany. Global trade tensions and transatlantic friction are intensifying, while the harshest Brexit begins to be seen as a reality. China, meanwhile, moderates its import appetite.

The port of Hamburg acts as a seismograph, able to measure financial tremors. "At the moment, we do not feel negative impacts, but we do not know what will happen," explains Ingo Egloff, president of the platform that represents the interests of 300 companies operating in the port. "If the Chinese government decides to lower growth, that will have consequences in the port. We also do not know what Trump intends to do, but it is clear that he can not stop importing pieces from one day to the next because they are processes that take time. And the UK is another problem, "says Egloff, who reminds that Rotterdam or Antwerp will have even more problems because they concentrate traffic with the English Channel.

The television tower in Alexanderplatz (Berlin). Alec Soth
The television tower in Alexanderplatz (Berlin). Alec Soth

Perhaps on the ground the dominant perception is the bussiness as usual, But the truth is that the predictions and some data have unleashed concern on the continent. The last, three days ago, when Germany managed to dodge the technical recession by the minimum, but certified the stagnation. The official statistics office published data for the fourth quarter of 2018, in which GDP growth was zero, after the economy contracted by 0.2% in the third quarter. This figure follows another one that is also worrisome, reflecting a 0.4% drop in German industrial production in December, which represents a decline for the fourth consecutive month. The entrance of orders in the industry also speaks in December of a fall of 1.6%, which is mainly due to orders from outside the euro zone. Meanwhile, the confidence of German exporters has registered a significant drop, according to the index of the Institute for Economic Research in Munich.

Exports also reflect a fall of 4.5% in December compared to the same month of the previous year, although the year ended with a rise of 3% in respect to all 2017. The mammoth and criticized German trade surplus fell to 227,800 million from the 247,900 of the previous year due to a greater increase in imports, according to official figures.

"The German economy will grow again for the tenth year in a row. It is the longest period of uninterrupted expansion since 1966, "a spokesman for the Ministry of Economy announced at the end of January, moderately complacent, to then state that" the winds blow against "outside the borders and that" growth is expected lower this year ", amounting to 1% of GDP, a substantial reduction compared to the 1.8% initially forecast.

General pessimism

In general, the forecasts of economic growth for the EU, but also for Germany, are not good. Brussels corrected its estimates for 2019 in the euro zone at the beginning of February, from 1.9% to 1.3%, foreseeing that the slowdown will continue. In the case of Germany, the EU Executive estimated 1.1% of GDP growth expected for this year, which is 0.7% less than in autumn and below the average of the euro zone.

"The fat cows are over," German Finance Minister Olaf Scholz had said in early January in the sensationalist weekly Bild. Scholz referred to the fiscal balance, to the five consecutive years of large surplus in the realm of fiscal rigor and devotion to budgets that respect the famous Schwarze Null, that is, the absence of deficit. The one of Germany is, as they recognize in Berlin, a relative belt tightening because it is an economy that part of a situation of continued bonanza. But at the same time politicians are very aware that in a context of neo-nationalist emergency, it is especially urgent to avoid anything that resembles a crisis. It does not escape them that the great financial crisis has served in Europe as a breeding ground for the populist forces that are campaigning with increasing assertiveness in the continent.

For its openness, but also for the type of business partners, Germany has special ballots to be a victim of volatility. Because the truth is that its four major export destinations – the United States, France, China and the United Kingdom – are going through turbulence that threatens to get worse.

The case of China and its deceleration is perhaps the most obvious. "The German economy is very sensitive to what happens in China because there is a disproportionate exposure and dependence on the big Asian factory. There is concern and it is clear that we have to diversify our exports, "says Thorsten Benner, director of the Global Public Policy Institute in Berlin. Benner explains that about 20% of the income of some large companies come exclusively from China.

The concern, experts agree, is not necessarily immediate, but has more to do with the medium and long term. The race for innovation could blow up the commercial relationship with China, which until now had been complementary. Beijing mainly bought products with high added value and sold cheap consumer goods. "But not anymore. They are becoming more competitive, and Germany has realized that it has to invest a lot more in artificial intelligence or, for example, in batteries for electric cars, "Benner thinks. He adds: "We have benefited a lot from these relations with China, but the time has come to reconsider."

The German Government presented its new industrial strategy this month with which it intends to face the Asian challenge. The idea is to create national and European super champions who have state support. The proposal follows a series of reforms with which Berlin tries to control the acquisition of German companies by foreigners – that is, Chinese – and runs the serious risk of colliding with European competition laws.

The entry into technical recession was saved by the minimum with a flat GDP in the last quarter

The concern for the health of the German economy worsened when the figures for the third quarter were known. The ghost of the technical recession glided over Berlin and speculations broke loose. However, according to the experts, these figures respond to a very specific situation. On the one hand, the prolonged drought of last summer and autumn caused a major disruption of the supply chain in the Rhine, where 70% of the goods that use river transport circulate. There were sections in which the water levels were the lowest since records exist, explain in the German River Traffic Administration (WSV). This meant that, although there was demand, it could not be produced because the boats could not navigate the rivers with less draft. The transport of chemicals and fuels was the most affected. "The heaviest boats simply could not work," explains Andreas Sömmel, of the Transport and Logistics Association of North Rhine-Westphalia (VVWL).

To the drought of the rivers was added the lack of adaptation of the automotive industry to the new regulations of certifications, which caused another brake of production due to causes beyond the laws of the market and which also has nothing to do with the so-called dieselgate, the Scandal of false emissions. It has to do with that the catalog of models of the German manufacturers is very broad and the adaptation to the new tests of broadcasts in autumn of 2018 was a complex process that has already been overcome and that is not expected to re-impact on the march economic of the country.


But apart from technical and bureaucratic adaptations, the truth is that the German automotive sector is going through a moment of profound transformation plagued by unknowns about its future. The race for the innovation of electric cars and autonomous and the growth of shared car platforms have turned upside down a sector discredited as ever by the scandal of the dieselgate. A series of legal proceedings in relation to the possible prohibition of certain diesel cars in large German cities has thrown even greater doses of uncertainty in the sector. How the industry is able to reinvent itself and adapt to the new reality will also depend to a large extent on the progress of the country's economy. For that reason, for some experts, the great concern is not so much the health of the economy this year or next, but the medium term, when they fear that the country may be left behind in the technological race that is fought with special intensity in the automobile sector.

Having overcome the two major conjunctural obstacles of the second half of 2018 -discharge and emissions certification- does not mean, however, that the horizon is clear or multicolored. It is at least what Isabel Schnabel, professor of Financial Economics at the University of Bonn, maintains, explaining that when the car was seen to be in trouble, when the third quarter ended in negative, everyone said that it was a temporary issue and that there would be recovery in the room. "But we have seen that exports have fallen and that the slowdown of the German economy has to do with the global situation, especially the weakness of China and other parts of Europe," adds Schnabel, who thinks that, even so, " There will soon be a recovery, especially taking into account the new fiscal impulses foreseen for this year and that will boost consumption ".

At the same time, the expert also interprets that the German economy is based on still very solid foundations. The predictions for the labor market are good, he says. "Domestic demand will remain quite strong and wages grow at a relatively fast rate. The labor market has improved in all aspects, also in the most precarious sectors. Many temporary and precarious jobs have been transformed into conventional positions. "

The unemployment rate is 3.1%, the lowest since German reunification. The big problem is the opposite, the lack of workers. A report by the Bertelsmann Foundation presented this week estimates that 260,000 immigrants a year are needed over the next four decades to cope with the aging of the population. The Executive presented in December a legislative package whose aim is to attract labor from other countries. Figures from the Institute for Labor Market Research and Employment (IAB), under the Ministry of Labor, indicate that there are 1.2 million vacancies in the country.

Germany can also boast that refugees – about 1.2 million asylum seekers have arrived since 2015 – have integrated much better than expected in the labor market. One in four refugees has a job, according to figures published last year by the IAB, under the Department of Labor. Without them and, in general, without foreigners – workers in eastern and southern Europe – registered employment growth would not have been possible.

Even so, the demographic challenge remains monumental. Baby boomers are now approaching retirement age and the problems will become more visible, especially for the pension system. Another threat is the growth of a real estate bubble, caused by an exorbitant rise in housing prices and which has special intensity in cities such as Berlin or Munich.

Simon Junker, economist at DIW, the German institute for economic research, predicts a speedy recovery. "The general situation of the German economy is very solid. There will be a slowdown due to the cooling of the global economy. Germany will be especially affected by Brexit and other global events because of its opening, but growth will recover because demand is still high and stable both internally and externally. "

Junker also cites the political stability of the country as a reassuring element, but the truth is that this glass can also be considered half empty. A weakened grand coalition of conservatives and social democrats has governed Berlin since last year. Maybe, compared to the situation in Italy or even in France, German politics may seem like a spa, but the risk of instability exists. It is an open secret that the Groko – as the great coalition is known in Germany – is a marriage of convenience in which there was never love, but now also the risk of divorce becomes increasingly important. With the relief of Chancellor Angela Merkel, as president of his party, the Christian Democratic Union (CDU), there are voices that ask to break with his turn to the center. And with the helm to the left of the Social Democrats (SPD), coexistence is becoming increasingly complex in the offices of Berlin.

Brexit effect

Junker and many other experts agree that the divorce that will have a more tangible and immediate impact on the German economy will be the Brexit – the United Kingdom is the fourth largest importer for Germany. The magnitude will depend, of course, on the terms agreed upon. "If the pound falls, it will obviously have a negative impact on the demand for products. That would also affect other countries in the area, which would also reduce their growth, which in turn would affect Germany, "says Junker. A recent study by the Institute for Research in Halle (IWH) figures in 100,000 jobs that could endanger a hard Brexit in Germany, much of them in the automotive sector.

It remains to be seen in addition how consumers will react. Because one thing is that they can afford to buy and another very different than a population with special interest for savings and austerity decide to do so in a context of insecurity. "German consumers are very cautious. They have a very particular behavior, which has to do with hyperinflation, with the thirties and the Second World War. Caution and saving are in the German DNA, "says Egloff, of the port's business platform. At the moment, the figures of retail sales show a fall of 4.3% in December -2.1% less than the same month in the previous year-, the highest in 11 years. The official predictions are much more optimistic and predict, however, that consumption will grow by 1.3% this year compared to 1% in 2018.

In the port of Hamburg, meanwhile, the cranes continue up and down and the businessmen are reluctant to stop seeing the glass half full. Egloff rubs his hands at the opening of four new lines with the US and says that in Eastern Europe, his backyard commercial, economies are growing at a good pace. "There have always been ups and downs, but in the end we always end up growing a bit," says Egloff. Then he clarifies: "But, of course, also in 2008 the predictions spoke of a promising future and the crisis entered fully and we lost three million containers. They did not see it coming. "


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