Wednesday, 22 May 2024
BusinessThe small glimpses of the German economy can blind the optimists: hitting...

The small glimpses of the German economy can blind the optimists: hitting bottom does not mean incipient recovery

Germany continues to show notable economic weakness. The overall picture has barely changed and the best summary remains flat GDP growth since just before the pandemic. However, small glimmers of light seen in some macroeconomic data released this week have raised some hopes that the situation may change. Most analysts warn, however, that these figures may show that bottom has been reached in some especially battered sectors, such as the traditionally powerful German industry; but in no case do they predict an incipient recovery. The usual economic locomotive of the Old Continent will not have an easy time removing – more than 20 years later – the seal of ‘sick man’ of Europe.

The fact that the industrial recession in recent quarters has become the headline par excellence of German weakness has caused the January industrial data to be awaited with considerable interest. The positive aspects of the figures have given rise to some small hopes that the experts have not been slow to nip in the bud. According to data from the official federal statistical agency (Destatis), the January industrial production It stood at 1% month-on-month (0.5% was expected), compared to -2% in December. Production in energy-intensive sectors, in turn, rose 3% month-on-month, after falling 6% in December. But scrutinizing the data further, negative tones appear. Despite the good start to the year, in year-on-year terms, industrial production continues to decline by more than 5% and remains around 10% below its pre-pandemic level. In addition, the December figure was revised downwards from -1.6%.

“The improvement was partly due to the strong increase in construction activity (+2.7%), although it came after an even bigger drop in December. There was also a strong increase in chemical production (+ 4.7%), which in turn contributed to increasing the production of the energy-intensive industry, perhaps suggesting that the fall in natural gas prices has encouraged some companies to resume their activity. On the contrary, automobile production plummeted (-7.6%),” explains Andrew Kenningham, analyst at Capital Economics.

Earlier this week, the sharp increase in exports January brought some hope. The 6.3% month-on-month increase in exports was encouraging and some voices already pointed to a change in dynamics. However, “this generous rebound occurred after a very weak month of December and the fact that exports barely increased during the year should dampen enthusiasm,” clarifies Carsten Brzeski of ING.

Returning to the industrial sector, the economist highlights the negative data also known this week: the sharp drop in industrial orders in January. The 11.3% month-on-month drop almost completely reversed December’s 12% month-on-month increase. This strong yo-yo effect was mainly due to bulk orders. Only the quarterly trend seems somewhat promising, Brzeski suspects, showing industrial orders 2.3% higher than those of the months of August to October.

“Although monthly industrial production data is volatile, we believe the sector will continue to struggle, given the weakness of national and global demand and the evidence that the German industry has lost some of its competitive advantage. The outlook for construction, included in German industrial production data, is especially poor given the decline in real estate prices. The weakness of industrial production is, in turn, one of the reasons why we think that the German economy as a whole will probably stagnate, at best, in the first quarter, after contraction in the fourth,” Kenningham agrees with his pessimistic vision from Capital Economics.

“January’s rise only partially offset the significant drop in previous months. The production trend continues to point downwards and this is unlikely to change for the moment, given the weak trend in incoming orders. It is not expected that production will stabilize until the second half of the year, when the impact of recent increases in interest rates and higher energy prices will ease,” believes Ralph Solveen of Commerzbank.

“This week’s data illustrates that German industry is bottoming out, but cannot hide its structural weakness. What we are currently seeing looks like a very gradual cyclical recovery. Indeed, industrial sentiment continued to weaken in February as order book assessments worsened and production expectations only improved marginally from very low levels. The slight inflection of the inventory cycle in December and January also stopped in February, as inventories rose again. This is a combination of data that points to a bottom having been reached, but not to an imminent rebound,” summarizes the ING economist.

Beyond the industry, another drop in retail sales in January, a further increase in consumers’ willingness to save and the persistence of a high political uncertainty They don’t really support the oft-heard argument that private consumption will drive the economic recovery this year, Brzeski adds. In fact, at least in Germany, it is usually industry and exports that drive the recovery, followed by consumption, and not the other way around.

To make matters worse, continues the expert from the Dutch bank’s research service, “Germany would not be Germany these days if there were not new problems weighing on the short-term prospects: strikes of train drivers, airport and airline staff, and supply chain disruptions as a result of the military conflict in the Red Sea have made another contraction of the German economy in the first quarter of the year even more likely.

Between cyclical and structural weakness

“Overall, the high volatility of the data at the end of the year makes it difficult to obtain a clear trend. What we extract from the first batch of hard data on the German economy in 2024 is the picture of an economy that is bottoming out, but that remains stagnant between cyclical and structural weakness. At present, an imminent rebound remains unlikely, although there is a vague light at the end of what is increasingly looking like a very long tunnel,” concludes Brzeski.

“The German economy’s long period of weakness continues. Temporary coronavirus-related declines aside, it has broadly stagnated for five years and is therefore trailing in terms of growth within the eurozone “As a consequence, a debate has started on the structural issues that make Germany less attractive as a place for investment,” laments Solveen from Commerzbank.

For the second half of this year and particularly the next, the German bank shows some confidence that the German economy can free itself from the stagnation that has lasted for five years. “The greatest source of hope is attenuation of the dampening effect of monetary policy, which is why the global manufacturing cycle seems to have already changed. Added to this is the flexibilization of energy prices and the positive effect of the increase in real wages on private consumption,” Solveen encompasses.

However, as always when talking about Germany in recent months, there are ‘buts’. “It is likely that this recovery is very moderate. Unlike previous cycles, it is unlikely to be supported by a significant easing of monetary policy. Although the ECB is expected to cut interest rates again from June, this process is likely to be very slow in view of persistently high inflation and will probably end as early as next spring with a 3% deposit rate, that is, only 100 basis points lower. that now. Added to this are the extensive structural problems in Germany, which will not prevent the recovery, but will slow it down. Therefore, we expect real GDP to grow only slightly, by 0.5% in 2025, after contracting another 0.3% this year,” they close from Commerzbank.


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