German economy likely to remain in "shock paralysis"

German Economy's Rocky Recovery Outlook in 2024

The German economic landscape in 2024 seems highly uncertain, with only a modest chance of a significant recovery. According to the German Economic Institute, businesses display lukewarm optimism, with 23% expecting growth, while 35% anticipate a downturn . Disappointingly, the northern and eastern regions have a gloomer outlook than their southern counterparts.

Based on a comprehensive survey of more than 2,200 companies by the Cologne Institute for Economic Research (IW Köln), businesses' economic expectations hardly budged since the autumn of 2022. The energy price shocks, rising inflation, and the risk of an energy shortage tainted their sentiments. Mikael Grömling, the IW head of economic research, and his colleagues pinpoint the reasons for Germany's economic stagnation.

Job Creations' End in Sight

One in five businesses plan to boost their workforce in the upcoming year, while just as many expects to reduce headcount, and nearly half wish to maintain employment stability . Significantly, the 2024 job market revelation hints at the end of the long-standing prosperous period of job creation in Germany.

Investment Plans Unchanged

With 27% planning to expand budgets and 36% aiming to curtail expenditures, the IW concludes that the lack of investment will persist in 2024 . This stance points to an unfulfilling future for Germany's growth prospects.

Construction and Industrial Sector Woes

The construction and industrial sector find themselves bleak and mired in difficulties. Expectations of increased production dipped to 25% and 26% for industrial and service providers, respectively. In contrast, construction companies bore the brunt of the downturn, with 54% predicting production decline compared to the 13% forecasting increase .

Regional Differences

The southern-western (Hesse, Rhineland-Palatinate, and Saarland) and Bavarian regions display more balanced expectations, while the outlook plummeted in the southern-eastern (Saxony and Thuringia) and northern (Schleswig-Holstein, Lower Saxony, Hamburg, and Bremen) regions. These areas revealed a good -20% consensus, a stark contrast to Germany's overall negative -12% expectations .

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Enrichment Data:

Enhancing our understanding of Germany's compromised economic situation, an array of factors becomes evident:

1. Structural Difficulties in Industry:
2. As projected by the Federation of German Industries (BDI), the industrial sector in Germany is teetering on the brink of a prolonged slump. Investments have been scant in Germany since reunification, resulting in empty order books, idle machinery, and depressed factories .
3. High Economic Uncertainty:
4. The economic policy environment in Germany has boasted unprecedented uncertainty since 2022, primarily due to the war in Ukraine and the subsequent energy crisis. This instability jeopardizes businesses' investment decisions, ultimately hindering overall economic stability .
5. Declining Industrial Production:
6. Industrial production registered a hefty 10% slump below pre-pandemic levels and clarified a 4% drop throughout 2024 . These figures exemplify the manifesting weakness within the industrial sector.
7. Diverging Investment Intentions:
8. While the Deloitte CFO survey indicated relatively unchanged investment goals around the zero line, the manufacturing sector exhibited deteriorating plans, whereas service providers expressed mild bullishness .
9. High Energy Costs:
10. The ongoing global energy crisis of 2022, primarily impacting energy-intensive German industry, led to skyrocketing energy expenses for companies and citizens. The intended halt of Russian energy imports has further compounded the problem .
11. Tepid Labor Market and Consumer Spending:
12. The labor market remains largely steady, but consumer spending remained stagnant in the first half of 2024, primarily due to skyrocketing uncertainties. However, some initial indicators of recovery surfaced since summer, with rising real incomes and shuddering inflation .
13. Dependency on China and Global Trade:
14. Despite vigorous efforts to diversify, the German economy remains overly reliant on China for various goods and raw materials. This susceptibility positions the economy at risk whenever global trade fluctuations arise .
15. Excessive Bureaucracy and Lack of Direction:
16. The unyielding bureaucracy, a shortage of skilled workers, inadequate technology adoption, and an absconding sense of purpose from the outgoing coalition government all contributed to the economic turbulence .
17. Demographic Challenges:
18. Germany's dwindling birthrate, manifesting one of the lowest birthrates in the world, represents a formidable long-term hazard to the economy. The resulting decline in the workforce demands heightened government spending to cover pension expenditures and healthcare necessities .

These variables collectively shape the predicted continuation of economic difficulties in Germany, as portrayed by various economic appraisals.

[1] ntv.de

[2] The Economist

[3] Der Spiegel

[4] Handelsblatt

[#source-1] BDI Economic Report

[#source-2] Deutsche Welle