Politics

Is the German Economy Now Destined to Decline?

The German economy is in crisis and its much-vaunted economic model is in question. The Russia–Ukraine War, a contracting Chinese economy and an increasingly protectionist US have triggered this historic crisis. Germany's overbearing bureaucracy, declining demography, widespread labor shortages, high tax burden and political paralysis are to blame too.
By
shutterstock_2296499859

September 20, 2023 05:11 EDT
Print

September has been a month of grim news about the German economy. Inflation, which brings back the specter of the 1920s, remains stubbornly high. The Federal Statistical Office tells us that the inflation rate, “measured as the year-on-year change in the consumer price index (CPI), stood at +6.1% in August 2023.”

It is not just the Russia-Ukraine War that is causing inflation anymore. The Financial Times reports that, even excluding food and energy, inflation remains at 5.5% with higher wage pressures making it sticky, if not structural. Inflation is affecting all industries. In construction, costs are now 38.5% higher than the pre-pandemic early 2020.

An economy in deep crisis

New orders for construction companies have dried up. Note that these orders are canaries in the coal mine and indicate confidence in the future. They are a forward-looking indicator for the economy. In August, the lack of new orders rose to 44.2%, up from 40.3% in July and a lot more than 13.8% in 2022.

Germany’s prestigious ifo Institute informs us that cancellations in residential construction have reached a record high. In August, 20.7% of companies reported canceled projects. The building industry is in trouble. Rising interest rates, soaring costs and weaker demand threaten to force many firms out of business. Several real estate groups are filing for insolvency. Germany is facing a shortage of 700,000 homes, and its housing crisis is bound to intensify. Last year, 295,300 dwellings were built, well short of the 400,000 target, and this year the gap will be worse.

Industrial gloom is deepening too. The Federal Statistical Office’s September 7 press release reveals that industrial production “was down 0.8% in July 2023 month on month after seasonal and calendar adjustment.” Carmaking has declined dramatically. Rising energy prices have hit German industry hard, and Europe’s manufacturing superpower has shrunk or stagnated for the past three quarters.

Even before September, stories about the German economy have been pessimistic. On July 24, Reuters reported that “activity in Germany, Europe’s largest economy, contracted in July.” Investor confidence has been plummeting and foreign direct investment in Germany falling. The OECD expects the German economy to stagnate and be the worst performer among the major economies in 2023.

In August, the ifo Business Climate Index fell for the fourth consecutive time. Sentiment among German managers darkened in manufacturing, services, trade and construction. The index is at its lowest level since August 2020, and companies are increasingly pessimistic about the months ahead.

For more than 10 years, Fair Observer has been free, fair and independent. No billionaire owns us, no advertisers control us. We are a reader-supported nonprofit. Unlike many other publications, we keep our content free for readers regardless of where they live or whether they can afford to pay. We have no paywalls and no ads.

In the post-truth era of fake news, echo chambers and filter bubbles, we publish a plurality of perspectives from around the world. Anyone can publish with us, but everyone goes through a rigorous editorial process. So, you get fact-checked, well-reasoned content instead of noise.

We publish 2,500+ voices from 90+ countries. We also conduct education and training programs on subjects ranging from digital media and journalism to writing and critical thinking. This doesn’t come cheap. Servers, editors, trainers and web developers cost money.
Please consider supporting us on a regular basis as a recurring donor or a sustaining member.

Support Fair Observer

We rely on your support for our independence, diversity and quality.

Will you support FO’s journalism?

We rely on your support for our independence, diversity and quality.

Donation Cycle

Donation Amount

The IRS recognizes Fair Observer as a section 501(c)(3) registered public charity (EIN: 46-4070943), enabling you to claim a tax deduction.

Make Sense of the World

Unique Insights from 2,500+ Contributors in 90+ Countries

Support Fair Observer

Support Fair Observer by becoming a sustaining member

Become a Member