FRANCE - For decades after WWII, Germany became the [1]industrial
engine of Europe. It remained that way until two years ago. Then, its
economy slumped and, after that, went dormant.
Once by far the most vibrant of any inside Europe, it peaked in the
third quarter of 2022 with an inflation-adjusted output of $954 billion
for the three-month period. "You have an economy in Germany that is
sick," says Elias Haddad, a senior markets strategist at Brown Brother
Harriman in London.
Two major economic issues are the problem. First was Germany's
long-term reliance on cheap energy (oil and natural gas) from Russia,
which once fueled its industrial heartland. When the Russians invaded
Ukraine and the West sanctioned imports of Russian energy, little was
left in Germany's energy structure.
[2]DREAMS OF 'UNITED STATES OF EUROPE' DYING FAST AS EU BACKTRACKS AMID
ILLEGAL IMMIGRATION
Energy Production And Consumption Ahead Of COP28 Climate Conference
Water vapor and exhaust rise from the steel mill of Salzgitter AG, one
of Europe's largest steel producers, as residential buildings stand
nearby on November 22, 2023, in Salzgitter, Germany. (Sean Gallup/Getty
Images / Getty Images)
"It had already shut down many of its nuclear power stations and then
closed the rest during 2022 and 2023," says Daniel Lacalle, chief
economist at Madrid-based investment company Tressis. "A lot of times
we hear about Germany as a country that is very logical and organized,
but this was done in the middle of a full-swing energy crisis."
The result of the lack of cheap energy has upended the manufacturing
sector, which has been in contraction since mid-2022, according to the
HCOB manufacturing PMI, which measures the sector's health.
[gettyimages-2180833801.jpg?ve=1&tl=1]
Workers from Volkswagen AG (VW) take part in a rally at the company's
headquarters and auto plant complex in Wolfsburg, Germany, on Monday,
Oct. 28, 2024. (Liesa Johannssen/Bloomberg via Getty Images / Getty
Images)
In addition to the energy issue, Germany now finds its exports in
direct [3]competition with China "China is competing on capital and
investment goods in which Germany produces," says Felix Huefner, chief
German economist at UBS investment bank in Frankfurt. "It means fewer
exports to China and more competition in third markets." That is
particularly true when it comes to the sale of automobiles. And, of
course, any large-scale competition in that area hurts Germany’s
export-led economy.
As if an energy problem and competing with China weren’t big enough
issues, Huefner also notes that the German economy is set to hit other
headwinds. In particular, the country faces a fiscal squeeze due to
rules and laws enacted after 2009 to restrain government deficit
spending. Since 2020, the country has had an annual back-to-back
deficit as high as 4.3% of GDP.
[German-Chancellor-Olaf-Scholz-1.png?ve=1&tl=1]
German Chancellor Olaf Scholz speaks during a joint news conference
with German Economy and Climate Minister Robert Habeck and German
Finance Minister Christian Lindner in Berlin, Germany. (Michael
Sohn/Pool via Reuters / Reuters Photos)
The debt brake is designed to avert structural indebtedness for the
country, and now the government has to tighten its financial belt. "We
estimate fiscal tightening is 20% of growth a year," Huefner says. "For
an economy in the new normal, the German potential growth rates are
probably between 0.7 and 0.8% annually." That's relatively low for the
country by historical standards.
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While the economy seems stuck, the political situation has recently
seen some tumult, which has the potential to hurt business as well.
Earlier this month, Germany’s Chancellor Olaf Scholz fired the finance
chief, Christian Linder. The move pushed the three-party coalition into
difficulty, and now an election has been called for February 23, 2025.
"It is by no means ensured that it will be a particularly stable two-
or three-party coalition," says Jan Techau, Eurasia Group’s director of
Europe, Berlin. "There is a fair chance we will get another wobbly
government again."
Tesla CEO Elon Musk, responding on X, called Scholz a fool, saying in
German, "Olaf ist ein Narr."
Musk, who has become what some consider President-elect Donald Trump's
closest adviser, is helping shape smaller government and free markets.
Trump pumps fist at Michigan rally
Former U.S. President Donald Trump speaks about the economy, inflation
and manufacturing during a campaign event at Alro Steel on August 29,
2024, in Potterville, Michigan. (Bill Pugliano/Getty Images / Getty
Images)
Finally, there is the threat of blanket U.S. tariffs across the globe,
including Germany, when [5]Trump takes office near the end of January.
That is particularly worrying because the U.S. is Germany’s largest
trade partner, constituting 9.5% of the total in 2022, data shows.
One factor that remains vague is whether the calls for tariffs are
merely a negotiating tactic or meant as a policy promise. "It’s
extremely hard to know what Trump will do," says Leo Barincou, a senior
economist at Oxford Economics in Paris. "If the most extreme crazy
stuff gets done, then that would be really bad," he says.
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However, limited tariffs on selected products, such as cars, chemicals
and agricultural products, may not be too much of a problem, Barincou
says. A rising dollar, and hence a falling value of the euro, would
offset some of the harm caused by the tariffs. "At a macro level, the
impact would be limited," he says.
Despite the country's troubles, Germany's stock market is up 13% this
year, as tracked by iShares MSCI Germany ETF.
References
1.
https://www.foxbusiness.com/category/fox-news-german
2.
https://www.foxbusiness.com/fox-news-world/dreams-united-states-europe-dying-fast-eu-backtracks-amid-illegal-immigration
3.
https://www.foxbusiness.com/category/china
4.
https://www.foxbusiness.com/politics/who-might-trump-pick-serve-treasury-secretary
5.
https://www.foxbusiness.com/category/donald-trump
6.
https://www.foxbusiness.com/apps-products
