Trying to figure out the German version of plus ça change, plus c’est la même chose was a waste of several minutes of Alphaville’s time.
Plus, it’s not really fair: things have changed for Germany. Europe’s biggest economy entered the pandemic at the end of a strong decade with virtually zero economic momentum, and has been struggling to relocate its joie de vivre ever since.
Based on IMF predictions, its output is set to contract by 0.3 per cent this year — the only major advanced economy that is expected to see GDP shrink:
Qu’est-ce qui se passe? Berenberg’s Holger Schmieding has been analysing the German economy for longer than most — labelling it the “sick man of Europe” in the late 90s.
This week he released a chunky new report looking at what’s working — and what isn’t — for the Germans. There’s some surprisingly upbeat conclusions:
Many observers of the German downturn make two mistakes: (i) They fail to distinguish between short-term gyrations caused by shocks or falls in global demand and the longer-run trend shaped by domestic supply-side policies. The business cycle looks set to turn up again by spring 2024. (ii) They misunderstand the nature of the German economy. Its key feature is not the focus on specific products, such as cars or chemicals, but the myriad of “hidden champions” with a proven record of adapting to serious shocks and challenges – if politics does not get in the way.
Schmieding highlights some key advantages Germany has now versus the dodgy decade it entered from 1995 to 2004. Condensed, they are:
— Record employment (making structural change easier to bear)
— Strong fiscal position
— Reforms underway to immigration and planning rules
— Broader political consensus around reform
He writes:
Germany faces major challenges, ranging from labour shortages to outdated bureaucratic procedures and partly misguided energy policies. But the current wave of pessimism is far overdone, in my view. Of course, the “golden decade”, which I predicted in a research report in 2010 due to the success of the Agenda 2010 reforms of 2003-2005, is over. Success has bred complacency and new shocks have battered the economy. Germany has duly lost some ground; however, its supply potential remains roughly in line with the European average
A particularly interesting part of his analysis concerns China, which is Germany’s largest export market. A Chinese slowdown would seem to be bad news for the German manufacturing powerhouse. Schmieding disagrees:
Some German sectors, such as the car industry, have become heavily dependent on the Chinese market for their total sales and profits. In the last few years, major German car manufacturers sold some 35-40% of the cars that they produce in China. The same holds true for some other companies, such as Germany’s leading producers of semiconductors.
However, the fate of global car companies headquartered in Germany and listed on its stock exchange matter less for the German economy than is often assumed. The profits they earn from employing Chinese workers to assemble cars in China with inputs from China to sell to Chinese customers play no major role for the German economy itself. They matter only in modest ways, primarily as the partial transfer of profits back to headquarters helps to pay salaries at home and the dividends to the minority of their stockholders who reside and pay taxes in Germany…
We do not expect China to stimulate its economy to such an extent that exports to China could recover strongly in the second half of 2023. The heydays of strong growth in China are over.
Indeed, he adds, the rise of near-shoring and friend-shoring could even be a boost for Germany:
In response to geopolitical risks highlighted by Russia’s war against Ukraine and by China’s threats against Taiwan, companies are trying to further reduce their dependence on China through local-for-local investments. They want their Chinese operations to depend less on inputs from countries that might conceivably sanction China, while diversifying their sourcing of inputs for non-Chinese operations away from China. Once the current cyclical downturn is over, the need to restructure supply chains could even boost demand for German machine tools for a while.
It’s not a glowing endorsement of Germany’s economic trajectory, but it’s far from damning. The full (18-page) report is free to read; your comments (as ever) can go in the box below.
Source: Economy - ft.com
