The News
Germany reversed its growth forecast for this year and now expects its economy to contract for the second straight year.
The world’s third-largest economy is on track to shrink by 0.2%, economics minister Robert Habeck said Wednesday. He had previously forecast a 0.3% economic increase.
“The situation is not satisfactory,” Habeck said. “Since 2018, the German economy has not been growing strongly any more.”
Germany — which is now facing a two-year recession, following a 0.3% contraction last year — has been beset by high interest rates and energy costs, lagging consumer spending, and heightened competition from China.
Just two days ago, the country’s finance minister also issued a dour diagnosis: “The German economy is treading water — we cannot be satisfied,” Christian Lindner said. “We are experiencing structural change combined with a loss of competitiveness.”
SIGNALS
Berlin faces industrial woes, conflicting coalition plans
Germany’s economic woes stem from a lack of innovation and lackluster industrial action, with the country finally realizing “that the old macro business model of cheap energy and easily accessible large export markets is no longer working,” a new ING Bank analysis found. Meanwhile, the leaders of Berlin’s unpopular and discordant three-party coalition government are each pursuing different paths to help stimulate the economy, a Handelsblatt columnist wrote: “The result is frustrating: there are three concepts … and no common plan.”
Car sector has a cough, so Berlin has the flu
Germany’s auto sector is especially feeling the weight of the likely recession. Traditionally the crown jewel of German industry, car production and demand have suffered this year: New car sales fell again in September. Last month, Volkswagen said it wasn’t able to rule out plant closures in Germany. “When the German automotive sector has a cough, Germany has the flu,” the global automotive head at KPMG told CNBC. In a sign of the government’s desire to revive the sector in any possible way, economy minister Habeck is betting on self-driving cars, calling them a “huge opportunity” for carmakers.
China competition looms large
Competition from China, especially on electric vehicles, is central to the industry’s challenges. Germany last week was in the minority of European Union states to vote against a plan to hike tariffs for EVs imported from China. German automakers worry that any repercussions — namely, retaliatory tariffs — would outweigh the short-term benefits. China is a strong export market for German cars that are already facing domestic competition in the Chinese market. At the same time, high labor and energy costs in Germany are making China a more attractive business location for some firms, in a further blow to Berlin’s growth outlook. German chemical giant BASF, for example, plans to increase its investment in China, despite the volatile geopolitical environment and calls to “derisk.”