How Germany will be able to improve its industrial competitiveness while pursuing its current climate policies is not altogether clear.
One of the (positive) economic surprises of the last six months has been the way that Europe has managed to cope with the higher energy prices brought on by the disruption to energy supplies resulting from Russia’s invasion of Ukraine and the response to it. This was helped by the flow of LNG (liquified natural gas) from, primarily, the U.S. and Qatar, as well as an unexpectedly warm winter. There are plenty of worries still hanging over next winter, but, for now the general reaction has been one of relief.
Nevertheless, recent revisions to economic data in Germany for the first quarter of the year have shown that that relief, while merited, should not be overdone.
Germany suffered its first recession since the start of pandemic, extinguishing hopes that Europe’s top economy could escape such a fate after the war in Ukraine sent energy prices soaring.
First-quarter output shrank 0.3% from the previous three months following a 0.5% drop between October and December, the statistics office said Thursday. Its initial estimate, last month, was for stagnation.
Some of that reflects one-offs such as the sharp fall in the demand for electric vehicles (EVs) following cuts in the subsidy regime applicable to them (no comment), although EV sales in Germany are still expected to grow in 2023. More generally, however, consumers’ willingness to spend has clearly been hit by higher inflation.
Ominously, there are clear signs of weakness of Germany’s all-important industrial sector, battling the hit to competitiveness brought about by higher energy costs, which have also, directly and indirectly, been pushed up by climate policies.
The key manufacturing sector is also proving to be a problem: A deepening downturn is casting doubt on the rebound many anticipate for the coming quarters.
Indeed, industrial weakness is taking a toll on the business outlook. A gauge of expectations by the Ifo institute fell for the first month in eight in May, while a survey by lobby group DIHK pointed to zero GDP growth for 2023. . . .
“The optimism at the start of the year seems to have given way to more of a sense of reality,” ING economist Carsten Brzeski said in a report to clients. “A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favor of weak economic activity.”
There are signs that the German economy will show some growth this quarter, and most (but not all) forecasters are expecting that growth will pick up some steam in the second half. We’ll see. Any faltering will be a concern as Germany approaches next winter, especially as weakness in the German economy has a way of dragging down economies elsewhere in Europe. And, of course, the worse it does, the greater the likelihood that political pressure will grow for some sort of deal with Russia, and the greater the reluctance to reduce dependence on China.
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“We must turn the corner in economic policy and put an end to the neglect of our competitiveness,” Finance Minister Christian Lindner said in Berlin, adding that this included the “acceleration of planning and approval procedures and strengthening the idea of technological freedom in order to leverage our creative potential.”
Speeding up the bureaucratic delays that hamper German economic performance (to take one notorious example, Berlin’s new Brandenburg Airport opened a decade late and billions over budget) would be welcome. But quite how Germany will be able to improve its industrial competitiveness while pursuing its current climate policies is not altogether clear.
The German finance ministry pushed back on Friday against the economy ministry’s plan to introduce a subsidised industrial power price, with a spokesperson saying that the budget did not allow for it and existing funds could not be redirected.
“There are no funds available for this project,” the finance ministry spokesperson said during a regular news conference, shortly after the economy ministry released its plan for a subsidised price of 6 cents per kilowatt hour (kWh) until 2030.