Daily Management Review

Economists Forecast Lingering Of Germany's Economic Pain


Economists Forecast Lingering Of Germany's Economic Pain
Economists had predicted that the largest economy of the European Union and indeed Europe’s economic powerhouse – Germany, would experience a fleeting slowdown but will bounce back strongly soon after.
However, it has been a year ha the country’s growth has been stuck in neutral with optimism of a turnaround fading away. Such a situation also threatens to cast a lasting economic gloom throughout the European economy.
Shifting consumer trends, China’s economic rebalancing, and a global trade war has forced Germany’s industry to be pushed in to a recession. Productivity growth seems to have turned negative in addition to a slowdown in job creation, souring sentiments and a shrinking in investment spending in the German eocnomy.
The lingering of the slowness of te German economic growth, which was iontiialyl beng perceived to be a one off aberration, now is turning out to reflect some of the deeper structural problems of the economy that prompted some analysts and economists to predict that the bleak economic outlook for Germany, and consequently for the 19-member euro zone, will continue even into the next decade.
“Germany is likely to remain in a zone between modest positive growth and slight GDP declines,” Commerzbank economist Jörg Krämer said. “Once the downturn is over, however, there is unlikely to be a strong economic recovery ... the German export industry will suffer for a long time to come.”
A similar bleak message about the country’s economy was also delivered a few days ago by Germany’s independent Council of Economic Experts who said that it is time to bring in reforms because “the good old days are over”.
The five-person Council, whose members include Isabel Schnabel, soon to be a member of the European Central Bank’s Executive Board, said that barriers to starting new businesses in Germany are too high, investment sentiment and actual investment by businesses is weak and the German industries are slow to adopt new technology.
Further the German economy is also negatively affected by its demographics with a rapidly aging population which impacts productivity. Even as there is shrinking of the labor market, there is also an apparent shortage of skilled workers. This is forcing companies to hold on to labour even during downturns because of apprehensions that they would be hard to amass skilled labour in a rebound,
Additionally, any recession results in banks restricting lending which exacerbates economic downturns. Further, banks are also unlikely to support the economy because of their already weak earnings.
“Banks’ low profitability poses risks to financial stability, because it hampers the build-up of equity and provides incentives to take excessive risks,” the Council said.
Given the current economic environment, stimulus packages would seem appropriate. But economists warn that the industry should not be expecting more.
The ECB has already almost reached its limit in its efforts to reduce costs of borrowings by bringing down benchmark rates. According to the estimates of the Bundesbank, in the 10 years to the start of this year, the German state saved 368 billion euros in borrowing costs.
Those savings could be used by the German government to boost spending because of the very low debt level that it enjoys. However, implementing a meaningful fiscal stimulus will most likely be politically unacceptable because of the obsession of the country to run a balanced budget.
And hence it is left to the external global factors for the German economy to stage a turnaround.