User:Noble Attempt/sandbox/German economic crisis (2022–present)

Several economists, business figures, and other experts express concern that Germany's economic downturn could cause the nation to reclaim its reputation as the "sick man of Europe" from the 1990's.

Background

From 2005 to 2019 Germany experienced a period of economic strength, often referred to as the "labour market miracle." Employment in Germany increased by more than 15%, rising from 39.3 million to 45.3 million people. This period of growth, combined with low unemployment rates, economic stability, and low interest rates, had previously made Germany an attractive destination for investors.

As of November 2021, Russian oil accounted for 17 percent of total imports in OECD Americas (625 kb/d). On 8 March US President Joe Biden announced a ban on oil from Russia, telling reporters, "We're banning all imports of Russian oil and gas energy. That means Russian oil will no longer be acceptable in US ports and the American people will deal another powerful blow to Putin's war machine." Germany's Minister for Economic Affairs Robert Habeck cautioned, "If we do not obtain more gas next winter and if deliveries from Russia were to be cut then we would not have enough gas to heat all our houses and keep all our industry going."

On 7 March, German chancellor Olaf Scholz and other European leaders pushed back against the call by the US and Ukraine to ban imports of Russian gas and oil because "Europe's supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way". However, the EU indicated that it would cut its gas dependency on Russia by two-thirds in 2022.

In September 2022, German Economy Minister Robert Habeck accused the United States and other "friendly" gas supplier nations that they were profiting from the Ukraine war with "astronomical prices". He called for more solidarity by the US to assist energy-pressed allies in Europe. Geopolitical tensions in the Middle East contributed to rising oil prices, with Brent crude oil futures climbing to $80 per barrel.

Crisis

Germany experienced a recession in 2023, which saw the country's economy contract by 0.3% in both the fourth quarter and over the whole of 2023, making it the worst-performing major economy globally that year. Germany was estimated to grow slower than all OECD member states in 2024, excluding the United Kingdom. Economists pointed primarily to Western sanctions of Russia following its invasion of Ukraine, resulting in Germany being separated from off from a large portion of its energy supply made of cheap Russian natural gas. These resulted in energy shortages and price increases, impacting significant amounts of economic sub-sectors from small local businesses to massive business projects. Germany became the only G7 economy to contract in 2023.

In 2024, the German economy entered its second consecutive year of recession. The German Economy Minister, Robert Habeck, announced a projected contraction of 0.2% in the country's gross domestic product (GDP) for the year, drastically reduced from its forecast of a 1.3% increase in 2024. Habek noted that Germany had experienced sluggish growth since 2018, attributed to a combination of internal structural problems and external global challenges. The country's position in the global economy was described as being "squeezed" between China and the United States, necessitating a reevaluation of its economic strategies. The announcement followed a 0.1% decline in the prior period, with no growth being recorded for Germany's fifth consecutive quarter. Germany projected the slowest growth among G7 nations for 2024.

Business

In April 2024, the ifo Institute, a prominent economic research center in Munich reported that over half (55.2%) of the companies in Germany's residential construction sector cited a lack of orders. Additionally, 17.6% of building construction companies reported project cancellations, a slight improvement from 19.6% in March. In 2023, construction sector insolvencies increased by over 20%.

In September, the ifo Institute reported a decline in its business climate index for four consecutive months leading up to September 2024. In August 2024, the index fell to 86.6 points from 87 in July, reaching a five-month low. This index, based on surveys of 9,000 German businesses across various sectors, indicated growing dissatisfaction with current business conditions and pessimism about future prospects. The consistent decline in business sentiment was seen as an indicator of ongoing economic pressure. The decline was particularly pronounced in the manufacturing sector, where sentiment fell to its lowest level since early 2020. The services sector also experienced a downturn, reaching its lowest point since February 2024. Clemens Fuest, President of the ifo Institute, characterized the situation by stating, "The German economy is increasingly falling into crisis."

Ifo economist Klaus Wohlrabe characterized the German economy as having "settled into stagnation." Factors he cited include a lack of orders across all sectors, weak investment, and consumer reluctance to spend due to inflation uncertainty, leading him to predict a potential further decline in German gross domestic product (GDP) for the third quarter of 2024, following an unexpected 0.2% contraction in the second quarter. LBBW bank economist Elmar Voelker and VP Bank Thomas Gitzel both expressed pessimism significant improvement before the end of 2024, the latter stating that the German economy was on the cusp of either recession or a period of minimal growth.

The Weil European Distress Index, a comprehensive survey of 3,750 European listed companies across various industries and economic indicators, reported in April 2024 that Germany had become the most distressed market in Europe. This distress was particularly evident in the industrial sector, which struggled with high interest rates, skilled labor shortages, and convoluted, anti-business regulations. The German economy's heavy reliance on exports and its rigid labor market further compounded these issues, leading to concerns about a potential recession and increased insolvencies. It noted that increasing rates of inflation and higher borrowing costs forced many businesses to halt or postpone projects, impacting capital investments and hiring decisions. Consumers were impacted by rising prices across various necessities and services, and higher mortgage costs that further reduced disposable income.

The German Purchasing Managers' Index (PMI) provided further evidence of economic challenges. The manufacturing PMI fell to 42.1, marking its 26th consecutive month of contraction and falling below market expectations. Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted, "The recession in Germany's manufacturing sector deepened in August, with no recovery in sight." Meanwhile, growth in the services sector continued to decelerate.

Deutsche Bahn, Germany's national railway operator, agreed to sell its logistics subsidiary, Schenker, to Danish competitor DSV for approximately €14 billion. Commerzbank, Germany's second-largest private lender, became a potential target for acquisition. Italian bank UniCredit increased its stake in Commerzbank to 21%, leading to speculation about a possible takeover. Some German companies, such as chemical manufacturer BASF, invested significantly in facilities abroad. BASF committed €10 billion to a new factory in China. These developments were viewed by economists as natural consequences of economic stagnation and structural changes. The trend of German companies investing more heavily abroad than domestically raised questions about the country's attractiveness as a business location.

Cost of living and housing

Consumer and retail sectors similarly struggled as households, burdened by the cost of living crisis and rising housing costs, tightened their spending. Younger consumers, in particular, faced increased debt levels, leaving them with less disposable income for discretionary purchases. Germany faced a severe housing crisis in 2024, affecting a broad spectrum of its population. The shortage of over 800,000 apartments nationwide resulted in more than 9.5 million people, predominantly single parents and their children, living in cramped conditions. This crisis was not limited to lower-income groups but increasingly impacted the middle class as well, leading Chancellor Olaf Scholz to describe housing as Germany's most pressing social issue. The German government's ambitious goal of constructing 400,000 new homes annually, including 100,000 social housing units, proved unattainable due to high interest rates and construction costs. The Ifo Institute for Economic Research reported that only 245,000 apartments were built in 2023, with projections for 2024 falling to 210,000. This supply shortage, coupled with high demand, led to skyrocketing rents across the country.

The crisis was most acute in large cities and university towns. The housing market in Berlin was significantly strained by the proliferation of short-term rentals through platforms like Airbnb, combined with new rental prices averaging twice that of older contracts. The government's attempts to mitigate the crisis, such as extending rent freeze laws until 2029, were often circumvented through loopholes particularly for new, modernized, or partially furnished buildings and apartments.

German industry associations expressed concern that the crisis in the housing construction sector could trigger a domino effect of widespread economic damage by deterring crucial skilled workers from abroad from Germany's labor market, while also potentially pushing voters towards political extremes. The crisis also led to a surge in homelessness, with some regions reporting a tenfold increase in just a few years. Organizations for navigating the difficult housing market such as the Deutschen Mieterbund (German Tenants' Association) saw record membership levels.

Employment

Concurrent with the declining business climate, employment in Germany fell at its fastest rate in four years. This trend was observed in private sector surveys, indicating a broader economic slowdown.

Foreign Investment

BNP Paribas Real Estate reported that foreign buyers accounted for 35% of commercial property purchases in the first quarter of 2024. This figure represented the lowest level of foreign investment since 2013, and marked a decline from 37% in 2023. The decrease in foreign investment was attributed to several factors, including high inflation rates and concerns about a potential recession in Germany.

GDP

Preliminary data from the German Federal Statistics Office showed that the economy unexpectedly contracted by 0.1% in the second quarter of 2024, reversing the 0.2% growth seen in the first quarter. This contraction missed forecasts of a 0.1% expansion. On a year-on-year basis, the economy also contracted by 0.1%, marking five consecutive quarters without growth.

Germany's regulatory environment was a subject of ongoing discussion. Since the 1980s, various German governments had pledged to reduce bureaucratic burdens and promote investment. However, progress in this area was limited. The situation was further complicated by European Union regulations, which some economists argued created additional administrative challenges for businesses.

The European Union's push for its Green Deal, aiming to achieve climate neutrality by 2050, influenced economic discussions in Germany. Some economists expressed skepticism about the growth potential of green technologies and argued that decarbonization efforts, while important, might not necessarily drive economic growth. Key issues identified as hindering Germany's economic performance included the declining competitiveness of German industry over the preceding decade, excessive bureaucracy and regulatory burdens, the need for digitization in government agencies, and a shortage of skilled workers.

Causes

Energy policy

Economists cited Germany's reliance on cheap Russian gas as one of many primary factors for Germany's economic stagnation, which began in the 1960s and intensified after reunification and the liberalization of the German energy market. Prior to the invasion, 55% of Germany's natural gas supply came from Russia. Russia was also Germany's primary source of oil and coal imports. This caused Germany's industry and broader economy to become dependent on cheap Russian gas, in addition to complacency brought on by Germany's economic boom that caused its government to ignore the European Commission's urging to diversity their energy supply. Germany's dependency became a vulnerability following Russia's invasion of Ukraine in 2022. The abrupt disruption of this energy relationship forced Germany to rapidly diversify its energy sources, leading to a 32.6% reduction in gas imports by 2023. The subsequent sanctions and supply disruptions led to a 35% increase in energy prices, contributing to inflation and economic instability.

Another factor cited was Germany's decision to phase out nuclear power fronted by The Greens, influenced by public concerns following nuclear accidents and cemented after the 2011 Fukushima disaster, which in turn created an energy supply gap. This gap was primarily filled by Russian natural gas, inadvertently increasing dependency on Russian ties. Despite early leadership in renewable energy adoption, Germany's transition has been hampered by antiquated bureaucratic obstacles, complicated and slow approval processes for renewable energy projects, and local resistance to infrastructure projects, each discouraging further investment in renewable sectors. As of 2024, renewable sources accounted for just over 52% of the country's electricity supply, insufficient to meet industrial demands.

CEO of renewable energy company RWE Markus Krebber warned that the fallout from the energy crisis could lead to permanent damage to German industry due to gas prices becoming structurally higher compared to European countries. The necessary transition away from prior sources of natural gas and diversification to other energy sources would result in prolonged detrimental effects to energy-intensive industries, potentially leading to significant and permanent declines in structural demand.

Technological adaptation

Some experts argued that Germany's economic troubles were partly due to its slow adaptation to technological advancements and a shift towards low-productivity sectors, contributing to declining productivity. The International Monetary Fund cited that Germany lagged behind other EU countries in offering online services to businesses, including registration and tax filing, which would need to be digitalized to speed up bureaucratic hurdles for businesses and consumers. It specifically cited that obtaining a business license took 120 days in 2024, more than double the OECD average.

German politics

Several German Business leaders reported that political in-fighting over new economic stimulus laws was a primary source of the German economy's wider issues. This included the blocking of a bill to cut bureaucracy and give tax breaks to German businesses from the upper house. The constitutional court also ruled attempts to greatly increase spending in the federal budget as illegal.

In addition, arguing and lack of compromise among German Chancellor Olaf Scholz three-way traffic light coalition further hindered efforts to stimulate the economy and contributed to the government's record low numbers of support in polls. Disagreements included those regarding the necessity of keeping German debt low, with liberals urging austerity measures while the Green Party pushed for greater infrastructure spending by amending debt rules in the constitution.

Housing and infrastructure

Germany's decentralized economic structure, with economic strength spread across several cities such as Berlin, Munich, Hamburg, Frankfurt, and Cologne, presented a challenge for real estate investors according to economists. Unlike countries with a dominant economic hub, Germany lacked a standout city that typically attracts concentrated foreign investment, preventing growth in housing demand and in construction sectors. This was coupled with falling property values and refinancing difficulties, which were felt across Europe. Many firms in the real estate sector found themselves unable to service their debt, limiting their capacity for new investments and ongoing projects.

Several bosses of German construction companies reported that despite there being a pertinent housing shortage in several German cities such as Berlin, that building new homes was "practically impossible" due to approval taking long amounts of time, costly noise and heating regulations, and governmental ignorance of how to solve issues in housing shortages and aid construction work.

Germany's unique position as a nation primarily consisting of renters exacerbated the housing crisis. In 2024, Germany was the only European Union country with more renters than homeowners, with over half the population not owning their homes. This situation was partly attributed to past political decisions, including the sale of thousands of government-owned apartments to private investors and a drastic reduction in social housing construction by local governments.

The International Monetary Fund reported that Germany's public investment had been near the bottom among advanced economies, with budgeted funds often underspent due to staff shortages in municipalities, resulting in hindered productivity.

Global Shifts

The United States was increasingly seen as a competitor for climate investments, while China, once a major buyer of German goods, had become a significant rival, especially in advanced manufacturing. The slowdown of the Chinese economy further sapped demand for German exports.

Supply chains

Supply chain disruptions caused by geopolitical events such as the Houthi attacks in the Red Sea impacted the German industrial sector.

Demographics

The International Monetary Fund posited that while weakness in Germany's economy could attributed to a combination of temporary factors, such as consumer cutbacks due to inflation, interest rate hikes by the European Central Bank, and a post-pandemic rebalancing of global demand away from manufactured goods, that fundamental structural challenges were significant contributors to economic struggles, including accelerating population aging. The country's working-age population, which had been buoyed by immigration over the previous decade, was projected to decline sharply as baby boomers retired. This demographic shift was expected to put downward pressure on GDP per person, further hinder productivity growth, and increase demand for healthcare services, potentially drawing workers away from other industries.

The IMF recommended that Germany make efforts to expand labor force participation, particularly among women, by improving access to childcare and reducing taxes for secondary earners in married couples.

The education system, once a strength, showed signs of decline, with estimates suggesting that falling math skills could cost the economy about €14 trillion in output by the end of the century. Political paralysis in Berlin, exacerbated by a budget crisis, limited the government's ability to invest in necessary reforms.

Consequences

Economic downturn trends were was illustrated by the closure of a 124-year-old steel pipe factory in Düsseldorf, where 1,600 workers lost their jobs. The chemical sector was particularly hard-hit, with major players like BASF SE and Lanxess AG significantly reducing their workforce. In the automotive sector, major suppliers like Continental AG and Robert Bosch GmbH announced plant closures and job cuts. Tire manufacturers Michelin and Goodyear planned to close several German plants. The renewable energy sector, particularly solar panel manufacturers, struggled to compete with Chinese rivals, leading to job cuts and potential relocations.

Political

In 2021, the Social Democratic Party (SPD) led by Olaf Scholz achieved unexpected success in the federal election, with particularly strong results in the eastern state of Brandenburg. This success was attributed in part to promises of economic reforms, such as raising the minimum wage.

By 2024, the political landscape had shifted dramatically. The Alternative für Deutschland (AfD), a far-right party, gained significant traction in eastern Germany. In the regional elections of Saxony, Thuringia, and Brandenburg, the AfD emerged as a leading contender, with polls indicating a possibility of winning state elections for the first time. Support for the ruling coalition at only 34% and the far-right Alternative für Deutschland (AfD) gaining popularity in polls.

Concurrently, a new political force emerged: the Sahra Wagenknecht Alliance (BSW). Led by a former East German communist, this self-described "left-conservative" party campaigned on platforms that included ending arms support for Ukraine, abandoning net zero targets, and reducing immigration levels. The BSW's rise coincided with a decline in support for the more traditional Left party.

Europe

The German DAX index underperformed compared to other major eurozone indices, resulting in associated European companies such as Siemens Energy, Qiagen NV, and MTU Aero Engines AG experiencing notable declines in their stock prices.

International

The challenging economic environment led to a notable trend of German businesses increasing their investments abroad, particularly in the United States. Analysis by fDi Markets showed that German companies nearly tripled their investments in the U.S. in 2023 to $15.7 billion. Major companies like Volkswagen, Mercedes-Benz, and RWE significantly increased their commitments in the U.S. market. This shift was attributed not only to Germany's industrial downturn but also to attractive policies in the U.S., such as the Inflation Reduction Act, which offered substantial subsidies to incoming businesses. Markus Krebber, the CEO of RWE, noted that while Europe had similar intentions to incentivize manufacturing, it lacked the comprehensive policy measures seen in the U.S., hence his decision to expand the business to the U.S. with a $15 billion investment plan.

External links

• www.example.com