Is future contraction the new normal?, The Ghost of Decline Covers Made in Germany | Europe | Normal

The dark clouds of economic recession are looming over Germany, and German and even European media have even brought up the title of "sick man of Europe" for discussion.

The latest German industrial output, foreign trade data, and GDP, among other leading economic indicators, have significantly deteriorated, indicating that the German economy is likely to continue to shrink in the third quarter.

Why is Germany, a traditional manufacturing powerhouse after the pandemic, still unable to revive?

Lillian has been working and living in Germany for nearly 20 years and is currently working as a project leader for a German company related to new energy. She told a reporter from First Financial that from a micro level perspective as a business person, the German investors currently in contact with the company are "quite pessimistic" about the investment environment in Germany.

"The investment environment in Europe and Germany is not ideal, and the relevant administrative agencies in Europe are not supporting it. Many German investors have also criticized it," she said. For example, in the field of lithium battery manufacturing, many investors compare the investment efforts of the German government with the support of the United States, and see that the investment environment of the United States is significantly better than that of Germany after introducing a series of laws.

She further stated that in addition, there have been long-standing issues such as bureaucracy in the German economy and culture, which were overshadowed by a large influx of orders during the "simple model" period of the economy. However, in the current situation where Europe is facing energy crises, high interest rates, and inflation, they have all surfaced.

Almost all leading economic indicators have deteriorated

Industry is the backbone of Germany's economy, accounting for approximately 24% of its GDP. Data shows that the initial value of Germany's manufacturing PMI in July was only 38.8, a new low since July 2020.

From a set of data, we can see the current predicament of Germany's manufacturing industry: France, which is also in Europe, had a monthly PMI of 45.1, Italy was 44.5, and Spain was 47.8; The PMI for July in the United States was 46.4, Japan was 49.4, and India was 57.7.

The latest industrial output data from Germany shows that the country's industrial output value decreased for the second consecutive month in June, a decrease of 1.5%, far exceeding the 0.1% decrease last month and exceeding expectations. Previously, it was expected that the output value would decrease by 0.5%.

According to segmented data, the output value of the German automotive industry decreased by 3.5%, while the construction industry decreased by 2.8%. The German Ministry of Economy's explanation for this is that despite the increase in demand, high energy prices and high interest rates have caused losses. "Due to the strong impact of fluctuations in large orders, although demand continues to grow, the outlook for the industrial economy remains bleak. Given the sluggish business and export expectations of enterprises, there are currently no clear signs of recovery," the department said.

"The bad news for industry is still ongoing," said Brewski, Chief Economist of the Dutch International Group and Head of Global Macroeconomics, in a research report

This latest data once again indicates that the German economy is continuing to stagnate, and this may also be a precursor to further bad news for Germany's GDP. He explained that Germany's "preliminary estimates of GDP growth stagnation in the second quarter may still be lowered, and the risk has increased.".

Previously released data showed that after a technical recession, Germany's economic growth in the second quarter remained stagnant, with zero growth on a month on month basis. After adjustment, it decreased by 0.2% year-on-year, which was lower than the general expectation of economists.

It is worth noting that the German statistics department also released the initial forecast for economic growth in the first quarter with zero month on month growth, but the final correction was a decrease of 0.1%.

The latest data released by the International Monetary Fund has revised down Germany's GDP for 2023, stating that Germany's GDP will shrink by 0.3%, making it the only economy among the G7 countries predicted by the IMF to contract.

"There is currently no sign of improvement," said Weicher, Chief Economist of the German Machinery Manufacturing Association, a leading engineering lobbying group in Germany

As mentioned earlier, an increasing number of economists predict that the German economy may experience another contraction as early as the third quarter.

Exports become a drag on GDP

Germany is a major exporter, but its recent foreign trade data has also been weak. On the 3rd, the German Federal Bureau of Statistics released data showing that, after working days and seasonal adjustments, Germany's exports increased by 0.1% month on month in June 2023, while imports decreased by 3.4% month on month. According to data, Germany's export value in June was 131.3 billion euros, import value was 112.6 billion euros, and trade surplus was 18.7 billion euros.

Among them, Germany's exports to EU countries in June amounted to 71.5 billion euros, a month on month increase of 1.3%; The import value was 60 billion euros, a decrease of 3.1% compared to the previous period. Germany's exports to non EU countries in June amounted to 59.8 billion euros, a decrease of 1.1% compared to the previous month; The import value was 52.6 billion euros, a decrease of 3.7% compared to the previous month.

Germany's exports to the United States were the highest in June, but decreased by 0.2% month on month to 12.7 billion euros. Previously, in May, Germany's export value was 130.5 billion euros, a decrease of 0.1% compared to April; Imports reached 116.1 billion euros, an increase of 1.7%, and the trade surplus narrowed to 14.4 billion euros. Among them, Germany's exports to the United States experienced the largest decline, at 3.6%; Exports to EU countries decreased by 1.5%; Exports to China increased by 1.6%.

Brzewski believes that, just like the overall economy, Germany's exports have stagnated. Foreign trade is no longer a solid support for Germany's economic growth, but rather a hindrance.

According to a monthly survey released by the Ifo Institute of Economics in July, the German export industry has never been as bad as it is now in over three years. Ifo researcher Volabe stated that weak foreign demand is a result of the gradual implementation of tightening monetary policies in the United States and Europe.

A senior person who has been engaged in freight forwarding business in the United States for a long time told reporters that the current retail sales in the United States have not declined. The reason why the US economy and employment are currently looking good is because its service consumption has always been good, but the decline is in physical consumption.

At the same time, economists interviewed by several journalists also stated that the current overall decrease in imports in the United States is related to its industrial backflow, which is caused by the partial backflow of its domestic manufacturing industry. At the same time, the "friendly outsourcing" policy implemented by the United States has also promoted the redistribution of the global industrial chain.

Professor Cui Fan from the School of International Economics and Trade at the University of International Business and Economics told First Financial News that the world's largest importing country, the United States, saw a year-on-year decline in imports in the first five months, which has an overall impact on all parties. "The domestic economy of the United States is very hot, but imports are indeed shrinking, which is related to its current round of import substitution industry policies."

Data shows that from January to May 2023, without seasonal adjustment, the total amount of US goods trade was 2138.933 billion US dollars, a year-on-year decrease of 3.7%. Among them, the total export value of goods was 837.554 billion US dollars, a year-on-year increase of 0.9%; The total value of imported goods was 1301.379 billion US dollars, a year-on-year decrease of 6.4%.

Specifically, "in recent years, the United States has accelerated the return of its manufacturing industry. Subsidies to the semiconductor and new energy industries, high tariffs on China, high tariffs on steel and aluminum in the name of national security, and local composition requirements for automobiles in the US Mexico Canada Agreement are all industrial policy measures with import substitution effects." Cui Fan explained that these measures have promoted domestic manufacturing investment and production in the United States, while also restricting imports.

"So, we see that the economic growth of the United States has not only failed to bring about an increase in imports, but has also been accompanied by an overall decline in imports. In addition, while prioritizing the return of manufacturing, the United States is also promoting policies such as nearshore and friendly outsourcing." Cui Fan said, "Therefore, we see that the degree to which exports from different countries are affected by the contraction of US imports varies."

Taking semiconductors as an example, Xing Yuqing, an economics professor at the National Institute of Policy Studies in Japan, told First Financial reporters that compared to Germany, Japan has gained investor attention because it has an advantage in strengthening the resilience and security of the global semiconductor supply chain, as the United States is promoting the restructuring of the semiconductor global value chain. However, there are currently some geopolitical factors in Germany or Europe that pose risks.

Economic stagnation becoming the "new normal"?

Brzewski believes that due to insufficient investment and almost no structural reforms, Germany has lost its international competitiveness in the past decade.

"The epidemic and the Russia-Ukraine conflict have exacerbated the problem, but it is not the root cause. Not surprisingly, according to a recent survey, German enterprises have never been so pessimistic about the country's international competitiveness. Through earlier investment and reform, the economy could have better responded to the current challenges." He explained that economic stagnation has become the new normal. "Under the new normal, the traditional growth drivers of the German economy, namely industry and exports, have actually become a drag on growth."

"In the past few decades, Europe's semiconductor manufacturing capacity has declined due to a lack of investment. As a result, Europe's overall semiconductor manufacturing capacity is less than 10% of the world's, while the combined total in East Asia is about 81%, and the United States is about 10%." Xing Yuqing told reporters, "One important reason is that they did not invest before."

Previously, a report released by the German Institute of Economics showed that foreign direct investment flowing out of Germany in 2022 was 125 billion euros, setting a new record, while FDI inflows were only 10.5 billion euros.

IW economist Rousseau believes that these numbers are warning signals that Germany is losing its appeal: population structure and high energy prices are affecting Germany.

The report shows that high corporate tax rates, rigid bureaucratic structures, and dilapidated infrastructure have made Germany less attractive. Meanwhile, investment programs such as the Inflation Reduction Act introduced by the United States have also made investments outside of Germany more attractive.

Lillian stated that taking hydrogen related project applications as an example, in the United States, subsidy payments are relatively rapid after application. However, in Germany, the procedure is to first establish a foundation, and then the foundation needs to undergo various audits before approving the money. This approach has its advantages, but in the current global competitive environment, it leads to "everything being done slowly, and a habit that has been formed for a long time is difficult to change.".