Germany’s second-quarter growth figures to be released on Friday are expected to be subdued as the outlook for Europe’s largest economy is clouded by the fallout from Russia’s war in Ukraine.
A recession in the coming months has a growing sense of inevitability, observers say.
And it’s not just growth that’s collapsing: it’s the whole German economic model that’s being called into question by the experts.
– No more cheap energy –
“The war in Ukraine puts an end to the German economic model as we knew it, a model that relied mainly on cheap energy imports and industrial exports to an increasingly globalized world,” say bank analysts ENG.
Cheaper to produce and transport, with prices fixed in long-term contracts, Russian gas has contributed to Germany’s economic prosperity for decades.
Industry consumes 30% of the gas burned in Germany. Before the war, more than half of the total supply came from Russia, a figure that had fallen to 35% by early June.
To completely wean itself off Russian gas, Germany is looking further afield for new supplies, including shipments of liquefied natural gas from the United States and Qatar, as well as a faster transition to renewable electricity generation.
– Globalization in crisis –
“As an exporting nation, Germany has benefited disproportionately from free trade. But that is exactly what is now in danger,” said the daily Sueddeutsche earlier this month.
The coronavirus pandemic and the war in Ukraine have shown the weaknesses of open economies, as supply chains have been disrupted and key components have become scarce. Germany has been among the most exposed to the logistics snafus of the past two years.
Germany’s dependence on China also worries politicians in Berlin. Close ties between Germany and China were “not healthy”, Liberal Finance Minister Christian Lindner said in April.
Beijing is Germany’s biggest trading partner, with trade between the two nations rising again by 15.1% in 2021.
“It’s potentially a new risk,” economist Claudia Kemfert told AFP. While the risk was less acute than reliance on Russia, more needed to be done to “focus on the national economy and build resilience”, she said.
– Inflationary shock –
After years of anemic growth, inflation is back in force in the European Union. In Germany, the memory of hyperinflation in the style of the 1920s weighs heavily in the public debate.
Beyond this psychological block, the obsession with price stability ensures a “competitive industry and a nation of savers”, according to a recent report by the OFCE.
Rising prices have led to rising social unrest in Germany. July saw the longest industrial action at German ports in 40 years and a day of strikes by Lufthansa ground staff.
Ahead of negotiations due to start in September, the powerful IG Metall union is demanding an 8% pay rise for 3.8 million workers in various industrial sectors, the biggest wage demand since 2008.
– Staff wanted –
Overshadowed by the war in Ukraine, the shortage of skilled labor is a major headache for German industry.
In addition to the million vacancies already announced, “Germany will need 500,000 additional employees every year for (the) next ten years,” said Marcel Fratzscher, head of the DIW think tank in Berlin.
The potential shortfall was a “risk to the country’s competitiveness and prosperity”, he noted.
Automotive supplier Continental sounded the alarm in July, saying the shortage “threatened the future of the German economy”, which “urgently needs controlled immigration”.
– Illusion of debt brake –
Germany’s return to strict fiscal rules in 2023 after a three-year hiatus imposed by the pandemic is a key goal of Finance Minister Lindner.
The target was “as surprising as it is unrealistic”, ING analysts said.
Germany is set to spend billions again to help households through the coming energy crisis and to invest colossal sums in switching to renewable energy.
“Germany will need time and money” to implement “investments and structural changes as determined and committed as it has demanded of other eurozone countries in the past,” the leaders said. ING analysts.