What wasn’t everyone whining about: energy prices, inflation, labor shortages. But now things are different. Almost like in a fairy tale that always ends well in the end, Germany is robust. The annual economic report that Robert Habeck is presenting today confirms this. We list the seven reasons that are actually encouraging.
It’s like in a fairy tale. In the end, the good wins according to the motto: And if you haven’t died, then live, love and shop today. A year ago, after Russia’s invasion of Ukraine, things looked bleak for Germany’s economy. It seemed like the perfect storm was brewing. Corona was not really over yet when the war already sparked the next crisis in Europe.
Sentiment on the stock market fell to freezing point. Gas and oil prices rose daily. The global supply chains were strained to the breaking point, the inflation rate rose monthly. Experts warned of a wave of bankruptcies, then of rapidly increasing unemployment. And the much-vaunted turning point seemed to have to be bought with one thing in particular: with debt. The bad word about “deindustrialization” made the rounds.
But now the chaos has sorted itself out and people have accepted the inevitable. Something like optimism is almost spreading again. “One senses an initial sense of relief,” says Siegfried Russwurm, President of German Industry. There is even talk of “spring fever”. There are seven solid reasons for butterflies in your stomach.
The price of gas has staged a rapid rally and it almost looks like it has rolled over on its side in exhaustion. First, the end of the pandemic in fall 2021 drove a price rally. Then came the war and the price climbed to an all-time high. However, it has been falling since mid-December. Full storage facilities, mild winter weather so far and more wind energy pushed the price down to a level last seen in June. On one of the most important gas exchanges, the Dutch TTF, a megawatt hour cost 66 euros at the end of January. At the peak of the previous price upward spiral at the end of August 2022, the wholesale price was 346 euros.
Experts like Andreas Schröder from the market research company ICIS speak of “normalization”. The increase could be partly explained by the reduced supply from Russia, but not to the same extent. Panic played a role and that’s just over. Nevertheless, the price level is high compared to the years before, when a megawatt hour was available for ten to 20 euros.
And: Although the rise has reached private consumers, the decline has not. A kilowatt hour of gas for the home currently costs an average of 18.4 cents. In December, a model household paid around 3,600 euros a year for gas. A year ago, as the Handelsblatt calculates, the price for the same amount was just 1365 euros – the new price is 163 percent more expensive.
The price of oil has also stabilized at a higher level. Commodity analysts estimate that a barrel, which corresponds to 159 liters, will cost between 65 and 100 dollars this year. Shortly after the war began, that price was $130. Then the US tapped into its strategic reserves, the EU oil price cap is forcing Russia to sell its oil cheaper, the global economy is not yet running at full speed and the organization of the oil exporting countries, OPEC, is throttling the oil flow less than expected. All factors are currently causing the oil price to land at around 85 dollars.
Despite all the crises, the 40 Dax companies will probably have made record profits again in 2022. The results for the whole year have not yet been published, but the record was set after nine months. A number of companies such as Deutsche Telekom, the adhesives giant Henkel and Mercedes-Benz had raised their forecast for the year. “It seems that the momentum of the first three quarters is sufficient for 2022 to be a record year overall,” says management consultancy EY.
This has been celebrated on the stock exchange so far, the Dax has had the best start to the year of all time with an increase of 8.4 percent in the first ten trading days. In particular, the titles that sold out the most in the past year were among the biggest winners in the first few days of the new year. The situation here is not stable, the whole thing smells like a flash in the pan. On the other hand, even after the outbreak of the Ukraine war, the really big slump did not happen. As cynical as it sounds: the war is now “priced into” the prices. Sonja Laud, who talks about investments at Legal
However, what applies to the corporations cannot be transferred one-to-one to the medium-sized companies that are so important in Germany. Here the mood is less euphoric. Delivery bottlenecks and energy costs are still a problem for German medium-sized companies, which do not simply switch to other countries with production like the large corporations. The KfW development bank speaks of a “significant burden” with regard to small and medium-sized companies.
The federal government no longer expects a recession for the current year. In its latest economic forecast, which the Green Federal Economics Minister Robert Habeck presents with the annual economic report, the government is assuming gross domestic product growth of 0.2 percent for 2023. In October, the government had expected a decline of 0.4 percent. The difference is only 0.6 percentage points, but it is the difference between plus and minus and is therefore of immense importance for the mood that prevails in the German economy. For 2024, the federal government is forecasting growth of 1.8 percent, which is more in line with the long-term average in Germany.
Three years of pandemic and then the war, which also means logistical problems, have severely disrupted global supply chains. According to a study commissioned by the Association of Research-Based Pharmaceutical Companies, Germany is particularly affected by the lack of wholesale supplies compared to other industrialized nations. According to this, the delivery bottlenecks in this country have been well above the European average since mid-2021. In the summer of 2022, 85 percent of industrial companies in Germany stated that they were affected by supply bottlenecks. Across Europe, this figure was just over 50 percent.
However, the industry has responded with unprecedented flexibility. Your counter-recipe is: We are expanding the warehouse. The economic research institute ifo has determined that 68 percent of companies have enlarged their warehouses. Almost as many have looked for alternative suppliers. A small proportion, namely 13 percent, have even started to produce what cannot be obtained themselves.
The forecast for 2023 therefore lets you breathe a sigh of relief. Supply bottlenecks in German industry eased in December for the third month in a row. The ifo Institute calculates that 50.7 percent of the companies are still suffering from the fact that ordered preliminary products and materials are difficult to obtain. In November it was still 59.3 percent. “The bottlenecks now appear to be easing in many sectors,” says Klaus Wohlrabe, head of the ifo surveys. “This will support the economy in the coming months.”
Private consumer spending, i.e. what people leave in stores, is estimated to have increased by four percent in 2022. The reason was the corona-related backlog demand for many services. However, a trend reversal already set in in the second half of the year. Real retail sales are falling, the general conditions have deteriorated, and record inflation of almost ten percent in the second half of the year is leaving its mark.
The high inflation cannot be compensated for by increases in income and the savings rate has fallen back to pre-2020 levels, according to the Hessische Landesbank. The tariff wages are unlikely to compensate for inflation in 2023 either, with an increase of almost five percent.
But looking ahead gives hope. The interest rate hikes that the European Central Bank finally agreed to are having an effect. German producers are asking less and less money for their goods. Producer prices for industrial products fell in December for the third straight month. The Düsseldorf economist Jens Südekum speaks of a “further spectacular decline” and adds: “This is a very good sign for the development of inflation.” Producer prices are probably the most important precursor to inflation. They suggest that recent developments in inflation are likely to continue. In October, the increase in consumer prices reached its peak of 10.4 percent compared to the same month last year. Since then, the inflation rate has been falling, most recently to 8.6 percent in December. “The increase in costs seems to have peaked,” says Commerzbank economist Ralph Solveen.
Another whispered topic in industry is the positive effect of inflation. In view of the weak euro, export nation Germany can offer its goods more cheaply in the dollar area, for example. This, too, has meant that the corporations have done well in 2022. In many cases, their export quota has increased significantly.
Andrea Nahles, a politician with a varied career, sometimes as SPD chairwoman, sometimes as social affairs minister, has now ended up as head of the Federal Employment Agency. Here she has to interpret the development on the labor market every month. Her most recent analysis is as follows: “Last year, the consequences of the Russian war against Ukraine – price increases, uncertainties, but also refugee migration – certainly left their mark on the German labor market. In view of the extent of the burdens, however, these are moderate.” That is a plain understatement, because unemployment fell significantly in 2022. Compared to the previous year, it fell by 195,000 to 2,418,000 people. Short-time work as an instrument used by companies to bridge short-term production stops hardly played a role anymore. Overall, the number of employees subject to social security contributions increased from June 2021 to June 2022 by 643,000 to 34.45 million.
Behind this is a boom that is so pronounced that it even leads to massive deficiency symptoms. The companies, the public service – they are all desperately looking for new people. The labor shortage has become the main constraint on growth. A demographic development that has been foreseeable for decades is slowing down the economy. The baby boomers are retiring. The development is currently even stronger than a wave of layoffs that has hardly been felt in Germany so far. So far, it has mainly come from US companies: from Tesla to the pharmaceutical company Johnson
The economist Marcel Fratzscher was not the only one, but one of the most prominent to have been wrong. In October of last year, Fratzscher said: He expects a wave of corporate insolvencies in the next two years. “It is very likely that over the next two years significantly more companies will go bankrupt or have to go out of business,” said the DIW boss. So far, however, the wave of insolvencies has been more of a pseudo-giant: it has been visible for years on the horizon as a major danger. However, when the time for which their arrival is predicted comes, they shrink to below normal levels. There is a slight increase, but: “The recent increase in corporate bankruptcies in October is at best a small one in a long-term comparison Step towards normalization of insolvency events and far away from a wave of insolvencies. In particular, the expected increase in figures in December 2022 tends to indicate a seasonal effect,” says Christoph Niering, insolvency administrator and chairman of the professional association. If he says it, it must be true, because on his guild lives on the opposite.
All of these are developments that give hope. Many of them are, of course, bought with debt. In Germany, there was also significant new debt in 2022. According to the Federal Statistical Office, the debt in 2021 was 2.32 trillion euros. According to the debt clock of the Association of German Taxpayers, the national debt has risen to more than 2.5 billion euros to date. Germany is thus heading for a debt ratio, i.e. the ratio of old debts to GDP, of 67 percent this year. This breaks the three percent limit for new borrowing that the EU has set itself, but it only exists on paper anyway. In fact, despite all the burdens, Germany is still in a good position in an international comparison with this debt ratio. Greece has the highest government debt ratio in the EU at 202.9 percent. In 2021, debt averaged around 92.1 percent of GDP in the EU and 100 percent of GDP in the euro countries. And in the USA, the record level of debt is likely to lead to a dispute between Republicans and Democrats again in the next few weeks, with all spending threatening to be blocked.
However, a lot of it is pure showmanship. Also in this country. Because unlike in private households, the state never has to repay its debts. As long as there is regular income for the state and expenditure does not predominate, there is no threat of national bankruptcy. As a rule, new loans replace expiring loans. The state can benefit from inflation. Debt can be reduced more quickly due to currency depreciation and increasing tax revenues.
The bottom line is that the assessment remains: The positive signals outweigh the negative ones. Germany could develop into a summer fairy tale this year.
