By Claude Smadja
At the end of 2018, Germany narrowly escaped a technical recession as it came very close to registering two consecutive quarters of negative growth. Then at the end of January 2019, Berlin slashed its economic forecast from 1.8 per cent to just 1 per cent for 2019. And a few days ago, the German government revised again its 2019 forecast cutting it by half, from 1 per cent to 0.5 per cent. In the present global context it would take very little additional headwind for Europe’s number one economy to slide into recession by year end.
Like all other major economies, Germany is confronted to the negative impact of a synchronised global slowdown, of the rise of protectionism and of the very disturbing uncertainties associated with Brexit. However, a number of structural challenges are emerging which might set the stage for rocky years ahead for the German economy.
The infrastructure network so crucial for economic efficiency is now showing increasing wear and tear due to the lack of sufficient infrastructure investment and increasing traffic. According to a study from theUniversity of Duisburg-Essen, traffic jams caused more than $68 billion loss in 2018 due to wasted working time and delivery delays, while — according to another study – the investment gap at the municipal level excluding regional and national projects stands at $180 billion. Eleven per cent of the country’s highway bridges are officially in “unsatisfactory condition”. Digital connectivity lags seriously behind. Germany ranks 76thin the world in terms of mobile phone penetration. While the present coalition has pledged an infrastructure investment push, it remains to be seen how much will be accomplished in the context of shrinking revenues due to the economic slowdown in a country which strives for budget surpluses.
Germany’s banking system, while considered to be in a stable and solid situation with very low rates of non-performing loans and good levels of capitalization, is also confronting a major challenge of profitability. This is not only due to the long period of very low interest rates – more than half of bank loans are on mortgages— but also because of high cost structures and the great fragmentation of the sector. Deutsche Bank, the only German bank of international dimensions, has suffered years of losses and continues to be hampered by an intractable cost structure. The bank is looking at a merger with Commerzbank as a solution to its problems and to be able to compete globally. But the move could result in a loss of revenue of one billion seven hundred thousand USDand it is facing strong resistance from the unions concerned about the loss of jobs.
Depending on how long interest rates will remains at their ultra-low levels — and this will be the case for at least the whole of 2019 – the situation could result in a lessening of the ability of the banks to finance the activities of the mittelstand – the small and medium enterprises – which have been a key driver of Germany’s economic dynamism.
Adding to the present woes is the crisis of international trade, particularly important for a country whose growth model is largely dependent on exports which represent close to 40 per cent of GDP. German industry is not only suffering from the slowdown of the Chinese economy — a very significant market in the last few years — but is also under the threat of President Trump raising tariffs on European cars, as German cars account for more than 45 per cent of all European auto exports to the US. Despite the recent wage increases, domestic consumption is not able to compensate for the possible loss of steam of exports as German consumers are wary about the future and keep saving to prepare for lower retirements benefits due to the inversion of the demographic curve.
Last but not least, the German auto industry – a key pillar of the economy employing 800, 000 people— already hampered by huge penalties and class action suits as a result of the “Dieselgate”, the manipulation of emission standards, is struggling to catch up in the global race for the electric car. German automakers are at risk of missing their target of one million electric cars on the road by 2020 and most probably will not be able to achieve the emissions targets also set for 2020.
The difficult economic year that Germany is facing will test the cohesion of the CDU/SPD coalition in Berlin in a context where the Alternative for Germany – the far right party – is the number one opposition force in the Bundestag with a lot of “nuisance capability” and the rise of populist voices has not been tamed. Chancellor Angela Merkel is gradually losing her ability to shape her country’s trajectory after the poor performance of her Party, the CDU, at the last elections.
One bright spot in this picture is the development of Germany’s startup ecosystem in the last few years, with Berlin now on its way to becoming Europe’s Number One startups platform with new companies flourishing in the e-commerce, AI and machine learning, fintech, healthcare, and blockchain sectors.
The German economy has overcome other crises in the past and might quite well prove able to address the structural and cyclical challenges it is now facing with the same efficiency that has made it the envy of the country’s neighbours and competitors. But Europe’s economic giant, the fourth largest economy in the world, has today to review and adjust the model on which its success has been based so far.
The writer is President of Smadja & Smadja, a Strategic Advisory Firm