#howgermanyblewupitseconomy

For a symbol of the depth of the malaise at the heart of Germany’s once-mighty economy, look no further than the announcement of enormous job cuts by one of the world’s largest suppliers of car parts.

ZF Friedrichshafen is shedding as many as 14,000 jobs in Germany out of a total employee population of 54,000 in the country.

This is no short-term move: the company, based on the shores of Lake Constance in the far south of the country, is chopping back its workforce over the next four years.

“Strong competition, cost pressure and weak demand for electric vehicles” are all to blame, the company said.

Its position is far from unusual and reflects the crunch rippling through an economy that was not long ago the envy of Europe and much of the world.

The loss of cheap Russian gas since the Kremlin’s invasion of Ukraine has devastated Germany’s industrial sector and left it struggling to find a new engine for growth. GDP has barely budged since the eve of the pandemic and Germany has found itself permanently teetering on the edge of recession.

The latest indicators suggest little is improving. GDP shrank by 0.1pc in the three months to June and, rather than the upswing one might usually hope for after an economic downturn, the stagnation appears set to continue.

The purchasing managers’ index (PMI), an influential business survey from S&P Global, shows the situation for manufacturers is, if anything, worsening, and is starting to drag down services businesses too. Optimism for the future is declining. Orders from abroad are down once again.

S&P Global’s composite PMI showed a reading of 48.5 for Germany in August, down from 49.1 the previous month and below economists’ forecasts. Anything below 50 signals economic contraction.

Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, branded the numbers a “real mess”.

“It’s hardly surprising that companies are ramping up staff cuts and slashing inventories of inputs even more aggressively than before,” he said.

AfriPrime App link:  FREE to download...

https://www.amazon.com/Africircle-AfriPrime/dp/B0D2M3F2JT

Economists at UBS have now cut their forecast for Germany’s economic growth to just 0.1pc for this year. Felix Huefner at the investment bank said weak exports, high interest rates and budget cuts to limit borrowing were all dragging down growth in the short-term.

But the longer-term strain of an ageing population, weak investment and a lack of “structural reforms” are also a problem.

“Weaker German growth than in the Eurozone may be a structural feature for the future,” he warned.

Those structural factors represent a stark change from the position of much of the past two decades, when Germany was a powerhouse that provided an anchor for the rest of the crisis-prone eurozone.

At the turn of the century, labour market reforms helped give Germany a much more flexible jobs market, making the economy more competitive and pushing unemployment down.

Much of Germany’s power is based on its Mittelstand, the widespread network of highly productive small and medium-sized businesses that typically specialise in high-end manufacturing and are world leaders in their niches.

This strong backbone of businesses powered export-led growth, enabled in part by a political willingness to trade heavily with China and to rely on cheap Russian gas.

However, shifting geopolitics have derailed this economic model. The Mittelstand were left at the mercy of autocratic regimes that sought to use trade as leverage over Berlin – Vladimir Putin, for instance, thought his stranglehold over energy supplies would force European Governments to stand aside when he invaded Ukraine.

Instead, Berlin rowed behind the rest of the West and dumped Russian oil and gas, sacrificing the Mittelstand in the protest.

At the same time, these businesses have also been stung by a slump in China.

“China’s slowdown has led to a decline in demand for the sort of goods Germany is very good at exporting,” says Chris Williamson, chief business economist at S&P Global.

However, it is not simply geopolitics that are punishing the German economy.

“Germany has been adversely affected by the transition to electric vehicles,” says Williamson. “We saw a slump in demand for combustion engine vehicles before the pandemic – there was a lot of uncertainty about whether to buy one or to wait to buy an EV.”

The auto industry has long been a powerhouse in Germany, which is home to Volkswagen, Mercedes-Benz and Porsche.

“Car manufacturers are making some adjustments now, but they are not winning the war on EVs, which is why the European Commission is looking at tariffs,” says Williamson. “That has hurt the automobile sector, which is a big driver of the German economy. There are lots of associated industries which have been dragged down with it.”

Today, the Mittelstand has found itself in a long stagnation.

Few expect China to return to its pre-Covid growth rates and Russian gas will not return anytime soon.

Combined with poor demographics and a widespread unwillingness to put in extra hours, “German potential growth is not that high any more”, says Salomon Fiedler, economist at Berenberg Bank.

Earlier this year Christian Lindner, the finance minister, sought to allay fears of a long-term slump.

“Germany is not the sick man,” he told the World Economic Forum in Davos. “After a very successful period since 2012 and these years of crisis, Germany is a tired man, after a short night, and the low growth expectations are partly a wake up call.

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

Yet not much help is coming from the Government either, which is hamstrung by bitter budget arguments between coalition parties, leaving little sense of direction for businesses.

“Germany is in a bit of a limbo for the time being,” says Fiedler.

AfriPrime App link:  FREE to download...

https://www.amazon.com/Africircle-AfriPrime/dp/B0D2M3F2JT