Does Germany’s economy need more than a cup of coffee?

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container ship at port in HamburgImage source, Getty Images

“I’m afraid that we will actually miss out on the future, because we’re taking too little risks.”

Verena Pausder is a successful German entrepreneur who is clear about where she thinks the economy is going wrong.

This week, it was confirmed that Europe’s biggest economy shrank by 0.3% last year.

Whilst the country avoided recession – thanks to a statistical quirk – most economists think Germany will be in that position when the numbers for the first part of this year are published.

Germany’s growth is being held back by the twin shocks of the energy crisis, caused by the war in Ukraine, and higher interest rates.

There are also long-term structural issues such as ageing infrastructure, a labour shortage and the cost of tackling climate change.

At January’s World Economic Forum in Davos, Germany’s finance minister Christian Lindner denied these problems made Germany the “sick man” of Europe.

“After very successful periods since 2012 and these years of crisis, Germany is a tired man after a short night, and the low growth expectations are probably a wake up call,” he said.

“And now, we have a good cup of coffee, which means structural reforms, and then we will be continuing to succeed economically.”

Lindner, Habeck and Scholz

Image source, Getty Images

For Mrs Pausder, who is chair of the German Start-up Association and founder of the kids app developer Fox & Sheep a “change in mindset” is what’s needed.

“I think we’re really good at kind of listing all the negative stuff and what we’re not good at. And I think what we’re forgetting is what we actually get done.”

She points out that despite the downturn there were still 2,489 start-ups founded last year and the country is making good progress in the switch to green energy.

Verena Pausder

Image source, Patrycia Lukas / Verena Pausder

Younger generations are more willing to take risks, she says. But as things stand, Germany’s pension funds – which are worth more than $700bn – “are not allowed to invest into asset classes like venture capital and private equity”.

“We’re used to these big brands of the past, and we want to do everything to have them in the future. And sometimes we put too much energy into conserving what we have [rather] then to investing in the new things.”

Those big brands have traditionally sold huge amounts of cars, machinery and pharmaceuticals abroad, driving economic growth and influencing government policy.

However, foreign demand “has been declining for many, many months”, says Dr Klaus Deutsch, the chief economist at the German Federation of Industries (BDI).

Exports to non-EU countries were down 9.2% in December compared to the same time a year earlier.

gdp graph

Dr Deutsch explains that Germany’s recovery depends on the world’s two biggest economies, as well as domestic concerns.

For exports, he says, “The question of greatest importance is whether the US economy can avoid a recession” as well as if China can overcome the many challenges its economy faces.

Around 7.5m people, or 16% of the workforce, are employed in manufacturing, and nearly half of what they make is sold abroad.

That gloom in the manufacturing sector is, he says, driving the pessimism amongst German consumers which “is a bit worse than in most parts of the world”.

wind turbine in front of coal power plant

Image source, AFP

December’s figures showed an uptick inflation to 3.7%, which is still lower than many other major European economies. The rate at which prices are rising means people are holding back their spending on everything from cars to furniture.

It’s a sentiment that’s not hard to find amid the hustle and bustle of office workers and tourists on Berlin’s shopping hub of Friedrichstrasse.

On a cold, but sunny winter’s day one man tells us that he notices higher prices everywhere from his rent to his energy bills, as well as when he goes to restaurants. “Berlin used to be a cheap city. That’s not the case anymore.”

A woman tells us that for her family of five the weekly supermarket shop used to come in well under 100 euros. “Now I spend well over that,” she says.

A lady who says she has a “good job and a good wage” is doing “ok”. However, she adds: “I think in general things are going to get worse.”

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Image source, AFP

Despite the shrinking economy, the number of people in work has increased steadily over the last two years. That points to lower productivity.

According to Moritz Schularick, President of the Kiel Institute for the World Economy, “Unhappiness isn’t mainly driven by the current economic situation. It is driven by a deeper cultural unease as well as uncertainty and fear. There’s a lot of angst.”

That sense of negativity about the outlook is reflected in the latest GfK survey of consumer sentiment, which says crises, war and inflation are all leading Germans to save rather than spend.

volkswagen car tower

Image source, Bloomberg

Mr Schularick thinks the move away from cheap Russian energy is less of a challenge that the long term issues and December’s court ruling which has forced Olaf Scholz’s government into budget cuts.

“One of the lessons we’ve learned from the UK and the 1930s, is that in these situations you don’t want to antagonise parts of the population even further by making painful budget cuts because that feeds the extremes and populists.”

Economic discontent has helped the political rise of the far-right AfD who are seen as against immigration. Amid a labour shortage that is something which is worrying business leaders such as the CEO of software giant SAP, Christian Klein.

“We are completely against any kind of extremism now, because we need to have those talents coming to us to innovate, to boost the economy. And that’s why it was time indeed, to speak up not only for myself, but for the German economy.”

The AfD’s deputy leader Peter Boehringer denies his party is bad for business and says companies biggest problem is high energy costs which have been caused by bad government policy.

Christian Klein

Image source, Bloomberg

If Germany’s economy is to return to growth innovation will be crucial, says SAP’s Christian Klein. Germany’s most valuable company saw the amount of money it took in grow 6% last year to $33.7bn.

“Many companies actually turn to SAP, especially in macroeconomic challenging times.”

He explains his company is helping its customers tackle challenges ranging from supply chains to climate change and productivity challenges caused by high inflation.

“In Germany, I don’t see a decline in IT budgets. What I actually see is that business leaders want to invest because they see tech as an opportunity to overcome those challenges.”

Additional reporting by Damien McGuinness in Berlin

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You can watch more about Germany’s struggle for economic growth on Talking Business with Aaron Heslehurst on BBC News. Viewers in the UK can watch on BBC iPlayer from 23:30 GMT on Saturday. In other countries it will be on at 23:30 GMT on Saturday, 05:30 GMT and 16:30 GMT on Sunday and 08:30 GMT on Monday.

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