Germany - Economy
The German economy is again struggling. For two quarters in a row, its economic output had declined — something economists label a "technical recession." Germany's gross domestic product (GDP) stagnated at the level of the previous quarter, and all the important economic indicators show a decline. "Germany's economic situation is darkening," was the conclusion 01 Qugust 2023 of the president of the ifo Institute, the Leibniz Institute for Economic Research at the University of Munich, Clemens Fuest. The ifo Institute surveys 9,000 executives each month about the current state of their businesses and their expectations for the next six months. The resulting ifo Business Climate Index (July 2023) had fallen for the third month in a row. The ifo researchers expected Germany's GDP to decline again.
Structural problems were holding Germany back. The country's economic model used to be based on importing cheap — primarily Russian — energy and cheap raw materials and semi-finished goods, processing them and exporting them as high-value, expensive goods. But that is not working anymore. The multiple crises of recent years have ruthlessly laid bare Germany's weaknesses. Energy-intensive enterprises are suffering under the high energy costs, and those who have relocated their production are not coming back. But Germany's problems do not end there.
Germany's economy shrank slightly in the first quarter of 2023 compared with the previous three months, thereby entering a technical recession, data showed on 25 May 2023. GDP fell by 0.3% for the quarter when adjusted for price and seasonal effects. After GDP growth entered negative territory at the end of 2022, the German economy had now recorded two consecutive negative quarters, A preliminary estimate had shown gross domestic product (GPD) stagnating at zero growth in the first quarter — meaning Germany would have narrowly escaped a recession. But recession fears were spurred again after data published earlier this month showed that German industrial production fell more than expected in March, hurt by a weak performance by the key automotive sector.
The warm winter weather, a rebound in industrial activity, helped by the Chinese reopening and an easing of supply chain frictions were not enough to get the economy out of the recessionary danger zone. Inflation had taken a heavy toll on the German economy, with consumers spending less on items such as food and clothing. To make matters worse, the outlook for the rest of the year isn't looking much brighter. Although the upward price trend had recently eased, the annual inflation rate of 7.2% recorded in April was still relatively high.
Compared with other industrialized nations, Germany is performing exceptionally poorly — and according to an estimate by the International Monetary Fund (IMF) will be the only large country to have a shrinking economic output. The country's industrial sector, the showpiece of its economy, is causing the most concern. It accounts for a relatively large portion of Germany's gross value added (GVA), about 24%, and hasbeen suffering through a global economic slump. The engineering and automotive sectors, which are heavily reliant on exports, are particularly feeling the effects of foreign customers holding back. Germany's economic decline had many causes. One of them is the monetary policy of central banks. The Federal Reserve, European Central Bank and others want to curb inflation via significant interest rate increases. That makes credit more expensive for companies and consumers, which had a slowing effect on another important economic sector in Germany — construction — as well as dampening companies' willingness to invest. Germany needs 400,000 foreign workers to make up the labor shortfall every year, according to the Federal Employment Office. And when the baby boomers retire en masse, the problem will only get worse. In June 2013 jawmakers from the parties in government — the center-left Social Democrats, the Greens, and the neoliberal Free Democrats — worked out the final details of a skilled labor immigration law. With a point system under a new "opportunity card," foreigners who don't yet have a job lined up will be permitted to come to Germany and given a year to find employment. A prerequisite is holding a vocational qualification or university degree.
The bill, initially drawn up by the labor and interior ministries, seeks to open up new opportunities for people from countries outside the European Union. They could come to Germany either thanks to qualifications and degrees that regulators here will recognize in a faster and more streamlined process; or based on their work experience; or through a point system for job seekers with potential but without an existing employment contract. Germany introduced what is known as the EU Blue Card, for highly qualified specialists, a decade ago. Now, it will also become easier to get, thanks to a lower income requirement.
Germany's major DAX companies looked at a pretty good year in 2022 despite high energy prices and high inflation. In the third quarter from July to the end of September, sales of the top 40 DAX companies increased by 23%, and profits by as much as 28%. Mercedes, Volkswagen and Siemens were listed as the companies with the biggest profits.
The German economy, Europe's largest, contracted by a record 9.7% in the second quarter of 2020 as consumer spending, company investments and exports saw a steep decline due to the coronavirus pandemic. The second-quarter contraction was the worst ever since documentation of GDP figures began in 1970. The drop was, however, not as steep as the 10.1% contraction that economists initially anticipated. Despite the economic slump, however, German business morale improved more than expected in August. According to a survey published by the Ifo Institute for Economic Research, firms assessed their current business situations with far more optimism than in the previous month.
The German decline was one of the less drastic second-quarter contractions among Europe's major economies as widespread shutdowns over the pandemic ground economic activity to a halt. France, Italy, Spain and the UK all saw double-digit declines in their economic activity. The German government forecast a 6.3% economic decline for the entire year.
Economic success became for West Germans a substitute ideology for the national pride they could no longer feel as a result of the Nazi atrocities. Thus Germans took pride in their economic miracle, reconciling themselves to the fact that in the political arena Germany had become a relatively minor participant. This was to be expressed later as “Germany being an economic giant but a political dwarf.”
The German economy will suffer the biggest slump in its history this year over the coronavirus crisis, the government warned on 29 April 2020, pushing Europe's top economy into a painful recession. German gross domestic product (GDP) is expected to shrink by a record 6.3 percent as demand for exports plummets and lockdown restrictions weigh on domestic consumption, Economy Minister Peter Altmaier said in Berlin. "We will experience the worst recession in the history of the federal republic" founded in 1949, Altmaier said. "The effects of the coronavirus pandemic will push our economy into a recession after 10 years of growth." This year's forecast drop in GDP is worse than during the global financial crisis in 2009, when Germany's economy contracted by more than five percent.
As Europe’s largest economy, Germany is a major destination for foreign direct investment (FDI) and had accumulated a vast stock of FDI over time. Germany is consistently ranked by business consultancies and the UN Conference on Trade and Development (UNCTAD) as one of the most attractive investment destinations based on its reliable infrastructure, highly skilled workforce, positive social climate, stable legal environment, and world-class research and development.
Germany's ascent to becoming a global economic power — known as the "German economic miracle" or Wirtschaftswunder — had its origins at the end of World War II when much of the country was in ruins. Allied Forces had bombed large parts of its infrastructure. The city of Dresden was completely destroyed.? The population of Cologne had dropped from 750,000 to 32,000. Germany was a ruined state facing an incredibly bleak future. But by 1989, when the Berlin Wall fell and Germany was once again reunited, it was the envy of most of the world.
The German economic success story, the Wirtschaftswunder, did not begin immediately. The outbreak of the Korean War in 1950 raised the demand for industrial goods dramatically all over the world. Several factors helped to make German products particularly competitive. By the 1950s, due to the destruction during World War II and some dismantling of German industry, Germany’s factories had more modern machinery than was found in most other countries. The Marshall Plan was directly responsible for much of the rebuilding of the industrial base.
Due to the cooperation of labor unions, wages were lower in the Federal Republic than in other Western countries. Also the general absence of strikes translated into higher productivity. Thanks to the age-old system of apprenticeship training, workers were also generally highly skilled. And because of the influx of refugees, there was an abundant labor force.
German industry was more flexible and could adjust to demand more easily than socialized industries in Great Britain and France. Due to its lack of natural resources, Germany had always had to rely on exporting goods. It had been most successful in the fields of automobiles, machine tools, engineering, ship building, and steel. Exports of these and other goods skyrocketed during the 1950s, and by the end of the decade, West Germany ranked second in world trade, outdone only by the United States. In the years between 1950 and 1954, the gross national product rose at an average annual rate of 8.2 percent, and in the years 1955 to 1958 at a rate of 7.1 percent.
Purchasing power more than tripled. After years of deprivation, Germans enjoyed their ability to consume and went through several “waves” of consumer behavior. After the Freßwelle (eating binge wave) came the Kleidungswelle (clothing buying wave), followed by the Einrichtungswelle (furniture buying wave) and finally the Urlaubswelle (vacations and travel buying wave).
Germany had a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the Eurosystem, comprised of the European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank).
Although corporate financing via capital markets is on the rise, Germany’s financial system remained mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders. Germany had a modern banking sector but is considered “over-banked” resulting in low profit margins and a need for consolidation. The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken). The private bank sector is dominated by Deutsche Bank and Commerzbank, with balance sheets of €1.35 trillion and €462 billion respectively (2018 figures).
Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company. There are no special nationality requirements for directors or shareholders.
Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews. The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation. In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.
German legal, regulatory, and accounting systems can be complex and burdensome, but are generally transparent and consistent with developed-market norms. Businesses enjoy considerable freedom within a well-regulated environment. Foreign and domestic investors are treated equally when it comes to investment incentives or the establishment and protection of real and intellectual property,
Germany had effective capital markets and relies heavily on its modern banking system. Majority state-owned enterprises are generally limited to public utilities such as municipal water, energy, and national rail transportation. The primary objectives of government policy are to create jobs and foster economic growth.
Labor unions are powerful and play a generally constructive role in collective bargaining agreements, as well as on companies’ work councils. Germans consider the cooperation between labor unions and employer associations to be a fundamental principle of their social market economy and believe this contributed to the country’s resilience during the economic and financial crisis. Insofar as job security for members is a core objective for German labor unions, unions often show restraint in collective bargaining in weak economic times and often can negotiate higher wages in strong economic conditions.
The German labor force is generally highly skilled, well-educated, and productive. Employment in Germany had continued to rise for the thirteenth consecutive year and reached an all-time high of 44.8 million in 2018, an increase of 562,000 (or 1.3 percent) from 2017—the highest level since German reunification in 1990.
By law, workers can elect a works council in any private company employing at least five people. The rights of the works council include the right to be informed, to be consulted, and to participate in company decisions. Works councils often help labor and management to settle problems before they become disputes and disrupt work. In addition, “co-determination” laws give the workforce in medium-sized or large companies (corporations, limited liability companies, partnerships limited by shares, co-operatives, and mutual insurance companies) significant voting representation on the firms’ supervisory boards. This co-determination in the supervisory board extends to all company activities.
Laws regulate cooperation between management and work councils, including the right of the workers to information about company operations that could affect them. Work councils are independent from labor unions but often have close ties to the sector’s labor movement.
The overwhelming majority of unionized workers are members of one of the eight largest unions — largely grouped by industry or service sector — which are affiliates of the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB). Several smaller unions exist outside the DGB. Overall trade union membership has, however, been in decline over the last several years. In 2016, about 18.5 percent of the workforce and 26 percent of the whole population belonged to unions. Since peaking at around 12 million members shortly after German reunification, total DGB union membership had dropped to 5.9 million, IG Metall being the largest German labor union with 2.3 million members, followed by the influential service sector union Ver.di (1.9 million members).
According to the Institute of Economic and Social Research (WSI), the number of workdays lost to labor actions increased significantly to 1 million in 2018, compared to 238,000 in 2017. WSI assesses this unusual increase was mostly due to the labor conflict in the metal industry, which resulted in a large number of warning strikes at various companies and plants. However, in an international comparison, Germany is in the lower midrange with regards to strike numbers and intensity. All workers have the right to strike, except for civil servants (including teachers and police) and staff in sensitive or essential positions, such as members of the armed forces.
Simultaneously, unemployment had fallen by more than half since 2005, and reached in 2018 the lowest average annual value since German reunification. In 2018, around 2.34 million people were registered as unemployed, corresponding to an unemployment rate of 5.2 percent, according to the Germany Federal Employment Agency. Using internationally comparable data from the European Union’s statistical office Eurostat, Germany had an average annual unemployment rate of 3.4 percent in 2018, the second lowest rate in the European Union. All employees are by law covered by the federal unemployment insurance that compensates for the lack of income for up to 24 months.
Germany’s national youth unemployment rate was 6.2 percent in 2018, the lowest in the EU. The German vocational training system had gained international interest as a key contributor to Germany’s highly skilled workforce and its sustainably low youth unemployment rate. Germany’s so-called “dual vocational training,” a combination of theoretical courses taught at schools and practical application in the workplace, teaches and develops many of the skills employers need. Each year, there are more than 500,000 apprenticeship positions available in more than 340 recognized training professions, in all sectors of the economy and public administration. Approximately 50 percent of students choose to start an apprenticeship. The government is promoting apprenticeship opportunities, in partnership with industry, through the “National Pact to Promote Training and Young Skilled Workers.”
An element of growing concern for German business was the aging and shrinking population, which will result in labor shortages in the future. Official forecasts at the behest of the Federal Ministry of Labor and Social Affairs predict that the current working age population will shrink by almost 3 million between 2010 and 2030, resulting in an overall shortage of workforce and skilled labor. Labor bottlenecks already constrain activity in many industries, occupations, and regions. According to the Federal Employment Agency, doctors; medical and geriatric nurses; mechanical, automotive, and electrical engineers; and IT professionals are in particular short supply. The government had begun to enhance its efforts to ensure an adequate labor supply by improving programs to integrate women, elderly, young people, and foreign nationals into the labor market. The government had also facilitated the immigration of qualified workers.
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