The once mighty growth engine of the EU now seems vulnerable as the threat of deindustrialization looms
German Finance Minister Christian Lindner, injecting some humor at the recent World Economic Forum in Davos, stated that Germany is not the “sick man” of Europe but rather “a tired man,” following the recent years of crisis, in need of a “good cup of coffee.”
However, the economic indicators point to something more than fatigue. Although Germany could be described as merely being in a mild recession – the GDP readings, after all, can hardly be called awful – in reality the economy finds itself in the uneasy place of having no clear prospects for an imminent recovery.
Economic figures paint a darkening picture
Initial estimates suggest a 0.3% decline in GDP in 2023, positioning Germany as the only major industrialized nation in the red. Germany’s national debt saw an increase of about €48 billion, reaching almost €2.6 trillion. While this may appear alarming at first glance, it’s crucial to consider the broader economic context. Germany’s debt-to-GDP ratio, standing at approximately 65%, is relatively favorable compared to many Western countries.
Moreover, Germany has implemented strict limits on deficits, demonstrating a commitment to financial prudence. In light of these measures, there is a counterargument that Germany could potentially consider taking on more debt.
Eurozone Q4-GDP out later today - Big4 already out. Growth in Spain & Italy (0.6%/0.2%), stagnation in France (0%), contraction in Germany (-0.3%). Germany stuck at pre-pandemic GDP-level. Poor performance! Partly due to gas dependecy & big industry #ecb#dkøkopic.twitter.com/cBsSS1r2Jm
Sentiment among businesses deteriorated further at the beginning of the year, as illustrated by the ifo Business Climate Index in January, which fell to 85.2 points. Both the current situation and expectations for the coming months were evaluated more pessimistically. The ifo Institute has reduced its growth forecast for 2024 to 0.7%, compared to the previously predicted 0.9%. This downgrade is partially attributable to additional cuts in the federal budget, which became necessary due to a ruling by the Federal Constitutional Court that prohibited leftover Covid-stimulus funds from being repurposed.
Deindustrialization in Germany: A growing concern
The German economy is on the brink of a crisis as deindustrialization firmly takes root. Companies, driven by economic considerations, are increasingly relocating their production overseas, posing a significant threat to a nation heavily reliant on industrial output. This trend has immediate and profound consequences that extend beyond the evident impact on industrial sectors. The offshoring of production could entail a surge in layoffs, further aggravating the economic challenges faced by the workforce.
In November 2023, according to preliminary data from the Federal Statistical Office (Destatis), German exports experienced a decline of 5.0% year-on-year, while imports recorded a notable decrease of 12.2%.
While the primary focus is on the industrial landscape, it is crucial to acknowledge the interconnectedness of these shifts. A case in point is the German chemical industry, which finds itself in a deep and prolonged downturn, having lost approximately 23% of its production capacity. Furthermore, leading managers have expressed considerable skepticism about a swift recovery. The challenges are exacerbated by Germany’s struggle with high energy costs, particularly affecting industries engaged in global competition. Despite government attempts to counteract these challenges, such as a billion-dollar electricity price package, success has been limited.
Meanwhile, according to a report by Deloitte, an alarming two out of three German companies have partially relocated their operations abroad due to the country’s ongoing energy crisis. This trend is particularly pronounced in critical sectors, such as mechanical engineering, industrial goods, and automotive industries, where 69% of companies have relocated their operations to a moderate or large extent.
Key findings from the Deloitte report shed light on the reasons behind this significant shift. Most businesses attribute their decisions to move operations overseas to the combination of high energy prices and inflation. Notably, companies in these industries are planning to relocate not only low-skilled component production but also, to a lesser extent, high-skilled production processes.
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