Sunday, 19 May 2024
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Germany needs looser monetary policy to grow

The German Government, through its Economy Minister, Robert Habeck, announced this week that it will drastically cut its economic growth forecasts for 2024 to 0.2% from its October estimate that anticipated an expansion of 1.3%. The locomotive of Europe urgently needs interest rates to begin to fall so that its industry and consumers have a much more accessible financing capacity and thus invest and return the sector to the path of competitiveness.

This week Olaf Scholz’s cabinet is going to present its economic report and its updated forecasts in which there is no very promising horizon.

The German head of Economy attributed this cut to the ruling of the Constitutional Court, which ruled that the traffic light coalition could not use 60,000 million euros not spent during the pandemic to finance environmental and energy projects: “This (due to the ruling), of course, has an immediate growth-limiting effect,” Habeck said during a round table in Leipzig.

The Minister of Finance, Christian Linder, assured in an interview for Bloomberg Economics that in Germany “we are no longer competitive.” The leader remained very critical during the colloquium: “We are becoming poorer because we do not have growth. We are falling behind.”

There are several factors that are weighing down the German economy. Are a series of circumstantial elements among which the price of energy, the shortage of specialized labor and economic problems stand out.

INGDirect’s Global Head of Macro, Carsten Brzeski, explained in an article that Germany’s competitiveness At the international level “had already deteriorated before the pandemic and the war in Ukraine, these events have only exposed structural weaknesses” such as the lack of investment in energy transition, digitalization, infrastructure and education. “These weaknesses are the result of the fiscal austerity” that characterizes the country, the economist stressed.

The president of the Federation of German Industries, Siegfried Russwurm, assured that “the economy is paralyzed in Germany” and that they do not see “any possibility” of a “rapid” recovery in 2024 and did not show hope for 2025 either.

In this sense, the Bundesbank continues to remain cautious regarding a reduction in interest rates. The president of the German central bank, Joachim Nagel, saw it as “premature” in November for the monetary policy of the eurozone to begin its path of relaxation, despite the fact that Germany needs this to happen so that its industry can finance itself and become competitive again. .

Economist Carsten Brzeski assured that among the factors that will hinder German growth this year is, precisely, the increase in the cost of money by the European Central Bank. Although the president of the entity, Christine Lagarde, announced at the beginning of the year that they would begin to cut them in the summer, Brzeski remains skeptical since “even if they begin to decrease in the summer, the consequences of the increases in previous months will still begin to be noticed.” , he assured.

In any case, the expert puts a positive note on several elements that can improve economic sentiment and GDP: “Positive growth in real wages, a rebound in Asia and, later, some interest rate cuts by of the European Central Bank” will be able to get the Germans out of the hole, but very slowly.

Recovery in the South

The latest S&P Global manufacturing PMI, corresponding to the month of January, presents a “slowdown” in the fall of the secondary sector in the Old Continent, rising notably from 44.4 points in December to 46.6 points at the end of January, “reaching its highest level in ten months.” Although it is still below the line of 50 points, which indicate expansion.

Despite this small respite, the chief economist of Hamburg Commercial Bank, Cyrus de la Rubia, assured that “there is a real possibility that the recession, which has already lasted a year in the manufacturing sector of the euro zone, could extend to the first quarter of this year.”

The expert showed the glass half full in his analysis based on the statements of Lagarde, who reiterated that the latest PMI data are “encouraging.” Under this premise, De la Rubia pointed out that the recovery of the European secondary sector will begin “in the southern economies, which could act as a catalyst to lift the largest economies out of the recessionary quagmire.” Making special mention of Italy and Spain as “the most encouraging” for recovery.

In any case, the rise in interest rates is only a small contribution to the solution to the German crisis. The Constitutional ruling reduced public spending to a minimum, causing a drop in investment in leading sectors for the economy.

The formula that many experts see to solve this stagnation are political measures that increase confidence and give security to companies, especially the industrial sector. At the same time, they propose working on the supply side to reactivate consumption, calling for reducing bureaucracy and more public investment.


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