Engine of the eurozone, industrial powerhouse, export world champion – just some of the ways Germany’s economy has been described over the years.
However, recent figures have indicated that the good times have come to an end, with Europe’s largest economy stuck in recession.
With economists looking for clues as to how long this could last, all eyes will be on the final reading for Germany’s July inflation figure when it is released on Tuesday morning. The year-on-year consumer prices index (CPI) rate is forecast to come in at 6.2%, just slightly lower than the 6.4% recorded in June.
Industrial production figures for June, out on Monday, will also give more insight into what is going on in the nation’s manufacturing backbone, which includes global carmakers such as Volkswagen, BMW and Mercedes, as well as the network of small and medium-sized engineering businesses known as the Mittelstand.
If the July inflation comes in as anticipated, it would mean Germany’s price growth remains some way above the headline level for the eurozone, which was 5.3% in July. The picture is even worse compared with Spain, where inflation was just 2.3% last month.
Sticky inflation is proving part of Germany’s current economic woes, especially when coupled with stagnant growth. “Slowcession” is the result, according to one economist.
Carsten Brzeski, global head of macroeconomics at the Dutch bank ING, describes the German economy as being “stuck in the twilight zone between stagnation and recession”.
It was May when the country’s economy was confirmed as being in recession. Revised official figures showed its performance was worse than originally thought and that it had in fact shrunk by 0.3% between January and the end of March, after a contraction in the final three months of 2022. Higher prices had forced households to rein in their spending at the start of this year, which had a bigger impact on growth than originally thought.
The second quarter, from April to June, was not much better. Forecasts had anticipated a small bounce-back in growth; instead it stagnated, coming in at an underwhelming 0%. Hence the “twilight zone”.
Again, weaker purchasing power among cash-strapped consumers was one of the main reasons, along with higher interest rates – currently 3.75% for the main deposit rate in the euro area, as set by the European Central Bank.
Germany’s companies are also feeling gloomy: the closely watched business climate index from the Munich-based Ifo economic research institute dropped for the third consecutive month in July. Brzeski puts this down to ongoing monetary tightening from the ECB, fears about the US economy, and a weaker-than-anticipated reopening in China – the market for many German exports, from fast cars to machinery.
To shake off the shadow of stagflation, Brzeski is calling on German ministers to urgently introduce a reform agenda.
That may not be forthcoming anytime soon, in part because the chancellor, Olaf Scholz, and German parliamentarians are, like much of the continent, currently on their summer break.
Responding to the latest quarterly growth figures just over a week ago, the economy minister, Robert Habeck, called the figures “anything but satisfactory”, despite the slightly positive trends in private consumption and investment.
However, Habeck showed little appetite for an economic stimulus package, saying this would only further fuel inflation.
“Whoever distributes money with a watering can in times of high inflation only brings one thing to growth: inflation,” he said.
The German government may yet strike it lucky, and find the situation has improved somewhat while they were enjoying their holidays. The labour market continues to hold up well, with a seasonally adjusted unemployment rate of 5.6% in July, lower than the level seen in June.
There was also some surprising data on Friday, when German factory orders defied all expectations with the biggest monthly jump in the past three years. Economists were surprised when the figures showed a 7% rise from May to June, thanks to a pick-up in major orders, including for machinery and aircraft. Airbus, which has a large factory in Hamburg as well as other smaller plants across the country, said it had seen a surge in aircraft orders in June.
For now, it is unclear whether this is a temporary respite or a sign that the eurozone’s largest economy is finally beginning to rebound from its recent troubles.
