ab8 February 2024Global Research and Evidence LabEuropean Economic CommentGermany: Key questions from international clientsClient feedback from recent marketing tripsDuring recent client marketing trips to the US, Canada and Switzerland, many discussions focussed on Germany, which was seen as essential to understanding Europe's current growth weakness, was important to watch for signs of recovery and was also key for tracking Eurozone wage developments. We review the key debates below.Weak growth - how much is structural?Germany's weak growth performance was a focus of many client discussions. Real GDP has stagnated over the last 2 years and in the last quarter stood just 0.1% above its Q4 2019 level. Over the same period, Eurozone real GDP has risen 3% (Fig. 2). Weak global demand (despite resilient US growth) was seen as one factor dampening German manufacturing activity. And while firms had benefitted from full order books, these are declining rapidly and new orders are weak (looking through the noise of big-ticket items, Fig. 1). Also, tight monetary policy was thought to be an important driver of weakness, with German construction activity declining 8.7% over the last two years, housing permits 30% lower and business sentiment in construction according to the ifo survey at its lowest level since 2005. While clients generally thought that these cyclical headwinds would fade during this year and agreed with our stronger growth forecast for 2025 (0.8%), most of the discussion centered on the question to what extent growth weakness was also reflecting structural factors that would lower the "new normal" potential growth rate. Amongst those were high and volatile energy prices dampening the appetite for investment (notably in energy-intensive sectors where production declined by 22% over the last two years), worries about an acceleration of "deindustrialisation" with production moving abroad, including to the US, and questions about the impact of Chinese competition on German carmakers. Furthermore, the challenging political backdrop, with the coalition government losing support in recent polls and elections looming (European parliament and regional elections in 2024, federal election in 2025) were seen as complicating decision-making and increasing uncertainty about future economic policy. Lastly, population ageing, which is proceeding more rapidly in Germany than elsewhere, was seen as a challenge. While all these factors imply a lower potential growth rate of perhaps just 0.8% (see this note), there was still cyclical upside from current GDP growth rates. We project GDP growth to rise from 0.3% in 2024 to 0.8% in 2025. Why is fiscal policy tightening?Given the weak cyclical backdrop and the multiple structural headwinds which require higher investment spending, many clients were perplexed by Germany's decision to tighten fiscal policy this...
