Europe's economic engine remains stagnant. And just as when Germany sneezes, the eurozone catches a cold, so the EU's major capitals are closely monitoring everything happening in Berlin. At the moment, the outlook is not exactly bright. Germany's five main economic research and analysis organizations have significantly revised their forecasts for 2024 downward. Just six months ago, Germany's economy was expected to grow by 1.3%, but that forecast has now been lowered to just 0.1%.
These revisions came after Germany's gross domestic product (GDP) fell by 0.3% in 2023, with German Economy Minister Robert Haveck describing the outlook as “drastically negative”. The coming months, with the first rate cuts on the horizon, will be key to determining whether the country can dig itself out of the hole it has found itself in.
Tractors blockade Berlin as farmers protest. Unmanned airports in Frankfurt and Hamburg. A bleak train station in Munich. These are just some of the images taken in Germany over the past three months. The country is simultaneously grappling with union demands to restore workers' purchasing power and shut down the economy. This situation is beginning to affect other parts of Europe as well. There's a good reason for that. Because Germany still accounts for more than a quarter of the eurozone's wealth. “Germany's strong dependence and interconnectedness with other countries such as France and Italy have slowed the growth of the eurozone economy,” said Raymond Torres, head of economics at the Savings Bank Foundation (Funkas). “It's too early to know what will happen in the medium term, but there are clearly negative impacts in the short term.”
Major international organizations such as the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) have already warned of the potential for further spread of infection. All forecasts point to slow progress in countries such as France and Italy, and by extension the eurozone itself. As of the end of January, the IMF's 2024 growth forecast was for Paris and Rome to grow by 1% and 0.7%, respectively, and for the euro area to grow by 0.9%. A few days later, the OECD followed suit, predicting growth rates of 0.6%, 0.7% and 0.6%.
However, both agencies predicted 1.5% for Spain (which is currently less exposed to Germany). “Spain is in a better position than other EU countries,” European Commissioner for Economic Affairs Paolo Gentiloni said in an interview with EL PAÍS. And while countries like Spain are boosting their economies further, the momentum is not enough to offset Germany's stagnation.
In fact, analysts at consulting firm BCA Research believe the eurozone could slip into a slight recession in 2024, even if the European Union as a whole manages to avoid a recession. After all, Germany still accounts for 28% of the eurozone economy. In a recently published book, Rest of Europe vs. Germany, BCA Research concludes that if Germany did not exist, the euro area's GDP would have grown by 12.8% over the past three years, compared to the official figure of 10.6%. The problem, said Mathieu Savary, head of European strategy at BCA, is that this trend will continue as long as Berlin continues to face significant obstacles such as the energy transition, austerity measures, real estate issues and weak external demand. . “These headwinds are pushing down consumption and, in turn, the country's GDP.” All these difficulties have had less of an impact in other EU countries, he added.
In Germany's case, Torres continues, the country is facing the combined effects of two economic shocks. One is related to inflation, sharp increases in interest rates, and the loss of purchasing power for families, which affects consumer spending. This situation has also affected other European markets, but the impact has eased over time. According to Torres, the second shock is specific to the German state and is related to changes in its production model, meaning that the consequences are structural in nature.
Until a few years ago, Germany's national economy was supported by cheap supplies of Russian energy and by outsourcing some of its production to Asian countries, primarily China. In other words, it is more dependent on Russia and China than other EU countries, with far-reaching implications given current geopolitical tensions and the push towards green energy transition. The country's decision to stop purchasing Russian gas after the start of the Ukraine war had clear consequences. However, it is also important to focus on China, Germany's second largest non-EU trading partner. A decline in exports to China and increased competition in the auto sector, especially electric vehicles, are hitting hard.
Another factor is the slump in investment activity by German companies. Timo Vollmerscheiser, economic analyst and deputy director of the IFO Institute, said that in the short term, German industry is suffering from weak global demand for capital and intermediate goods, the very things German industry is good at. Says.
In addition to weak exports, there is “great uncertainty regarding the German government's economic policy,” Wollmersheiser said. And this has led companies to postpone investment decisions. As a result, he says, “Germany has become less attractive as a business location.'' Other reasons include high taxes, bureaucratic hurdles, slow digitalization, high energy prices and labor shortages, Wollmerhäuser said. Due to all these factors, the IMF estimates that Germany will become the G7 country with the lowest growth rate by 2024. Last year, it was the only member of the group whose economy contracted.
southern chance
BCA Research believes Germany's slowing growth could drag down the eurozone and have spillover effects on other economies such as France and Italy. Global growth momentum over the past 12 months appears to have largely bypassed Europe. The region is facing the effects of soaring energy prices, high interest rates to curb inflation, and weak consumer confidence. “These headwinds are particularly affecting manufacturing, including in Germany,” said Alfred Comer, IMF Europe director.
Analysts say the divergence between Germany and other European countries, especially in the south, will widen further this year as the former continues to stagnate and the latter improves. According to the European Commission, Spain is expected to grow by 1.7% in 2024 and 2% in 2025, while Greece, Portugal, Malta and Cyprus are also expected to grow significantly.
But Ángel Talavera, head of European economics at Oxford Economics, believes the south will not be able to lift the whole region, saying: “German stagnation will inevitably lead the eurozone back to ultra-low growth.'' ” he explains. Berlin, like other EU countries, has been affected by rising interest rates. However, Talavera said the country faces further challenges, including low demand, particularly low external demand, long wait times for project approvals and regulatory hurdles that are impeding investment. claims.
Torres said that given Germany's difficulties, many multinational companies may reconsider where they invest or set up offices. So far, this has not translated into relocation, but “we are starting to see a shift in trends in terms of new investment,” he said.
The IMF argues that even if growth recovers in the short term, Europe's growth prospects will remain weak without reforms. Alfred Comer points out that Europe's per capita income is one-third lower than the US average, and also notes that the region could improve productivity by “reducing internal barriers” and improve the potential of the single market. He also states that it is important to realize one's sexuality. This must be complemented by changes at the national level, he added. In Germany, there is “significant scope to reduce bureaucracy and barriers to new business creation”.
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