Long the locomotive of Europe, Germany is expected to suffer a more intense recession than expected in 2023, estimates the IMF in its latest quarterly forecasts. Blame it on high interest rates and moribund trade.
In its quarterly global forecasts, the institution now expects a contraction of 0.5% in the gross domestic product (GDP) of Europe’s largest economy, compared to a decline of 0.3% forecast in its previous estimate in July. The report confirms that Germany will be the only G7 country to see its activity contract this year. This poor performance of the traditional locomotive of the EU affects the growth forecast for the euro zone, also lowered by 0.2 percentage points for 2023, to 0.7%. Following a summer marked by a succession of bad indicators, Germany will once again experience “a slight economic contraction” in the second half of the year, as was the case during the last winter, predicts the IMF.
The world’s fourth largest economy is experiencing a double shock, with the “weakness of sectors sensitive to interest rates” and the “slowdown in demand from trading partners”, he explains. It is a little better, without being flamboyant, within the other countries of the euro zone. For France, the IMF’s growth forecast was revised upwards by 0.2 percentage points, to 1.0%, taking into account the catching up of industrial production and external demand during the first half of the year. In Italy, where the inflation rate is the highest in the euro zone, activity will increase by 0.7%, or 0.4 points less than previously forecast.
The Washington-based institute forecasts a rebound in Germany in 2024, but revised its forecast downward to 0.9% GDP growth from 1.3% in July. The chronic weakness of German growth in recent years has brought back the specter of the “sick man of Europe” in the media, a phrase dating back to the late 1990s after the reunification backlash. Soaring energy prices and dependence on foreign trade with China, its main partner for several years, have turned against Germany since the Russian war in Ukraine and the decline in activity at the Asian giant, observed Isabel Schnabel, a German member of the European Central Bank’s governing council, in a recent interview.
Other structural factors, such as the rapid aging of society and growing labor shortages, could “have longer-term effects” on growth, she adds. The burden of regulations and the slow digitalization of the economy are also regularly called into question. A major CO2 emitter due to the weight of industry and an energy mix partly dependent on fossil fuels, the country must accelerate its green and technological transformation if it wants to see the success of “Made in Germany” continue. export, pillar of the German model. “Germany is like a forty-year-old who has been successful for a long time, but who must now reorient himself professionally,” Clemens Fuest, of the German economic institute Ifo, argued in an interview this summer.
The cocktail of unfavorable factors makes it “necessary to act”, recognized the Minister of the Economy Robert Habeck at the end of September. “We must remove obstacles to investment, eliminate the jungle of bureaucracy and make it easier for entrepreneurs,” urged Robert Habeck. The main German economic institutes even see the decline in GDP reaching -0.6% this year, worse than the IMF forecast. The government will update its economic forecast for 2023 on Wednesday and should now expect a drop in GDP of 0.4%, according to several media. Be careful not to underestimate Germany’s resources, observes Holger Schmieding, economist at Berenberg Bank.
The country’s “hidden champions,” small and medium-sized businesses that are often highly specialized, are used to resisting shocks and finding new opportunities, he wrote in a recent analytical note. “The current wave of pessimism is largely exaggerated,” according to him.
