Rough waters ahead Risks multiply for Germany's economy

Think tanks have cut their 2019 growth forecasts amid concerns about trade with China, the impact of Brexit, and weak corporate investment.
Quelle: Mauritius
No safe harbors for German trade.
(Source: Mauritius)

What a difference a year makes. In early 2018, economists were tripping over each other to issue optimistic forecasts. A short 12 months later, they see growth slowing markedly, with so many risks that even their diminished expectations might be too high.

The prestigious Ifo Economic Research Institute in Munich is the most pessimistic, forecasting 1.1 percent growth this year after an estimated 1.5 percent in 2018. The biggest factor, according to Ifo director Clemens Fuest, is that China will no longer drive world growth. “Concerns are justified,” he said.

But there are plenty of other risks as well: The trade war between the US and China, Brexit looming at the end of March, Italy's ballooning budget, structural problems in the auto industry, and slackening investment in industry coupled with lagging innovation.

The German economy, heavily reliant on exports, already contracted unexpectedly in the July-to-September period, shrinking 0.2 percent, although economists blamed it on an exceptional situation in the car industry.

The headwinds are even denting the confidence of the perennially optimistic Mittelstand, the small and medium-sized companies that form the backbone of the German economy. For the first time in two years, the KfW-Ifo Mittelstand business confidence index dropped into negative territory last month.

This week's shock warning from Apple about slumping iPhone sales in China again confirmed that the US-China trade war constitutes a real threat to the world economy. For one thing, the conflict is hitting US industry, notably carmakers, harder than expected.

Grafik

Even without the trade war, though, signs suggest growth is cooling in China. Infrastructure investment, which grew 19.8 percent in 2017, edged up only 3.3 percent last year as this growth stimulus reached its limits. The International Monetary Fund is forecasting the Chinese economy will expand 6.2 percent this year, down from 6.7 percent last year.

The most immediate risk to the German economy, however, is Brexit, especially if Britain leaves the European Union without a transition agreement. A no-deal Brexit could cut growth in Germany by 0.5 percent, while an orderly departure would only slice off 0.14 percent, according to the Institute for Economic Research in Cologne.

Concern about Italy’s budget confrontation with Brussels has receded after a tenuous accord, but could resurge at any moment.

Faltering innovation

Mittelstand companies who don’t have any breakthrough innovations are likelier to be dragged down by the slowdown in global growth. A recent study from the industry association BDI found that Germany still ranks fourth among 35 countries surveyed in innovation, but is losing ground against the top three – Singapore, Switzerland and Belgium.

“Continuing poor performance in the innovation race is a cause for concern,” BDI President Dieter Kempf said. A key problem, he added, is developing the right digital business models. The government has promised to support development of artificial intelligence and the 5G network and this could be decisive for future growth.

A decline in business confidence would normally depress investment spending. However, many German companies are working near capacity and desperately need to spend on digital innovation. These two factors should “stabilize” investment outlays, economists at Deutsche Bank wrote. They expect capital spending to increase by 2.7 percent this year after an estimated 4 percent last year.

Skills deficit

Germany's construction boom should also continue, so that overall investment spending will grow just slightly less than 3 percent, economists agree – an encouraging impetus for economic growth.

The job market is also providing strong support for growth. Employment in Germany has been growing steadily since 2004 and that trend will continue in 2019. The Federal Statistics Office counted 44.8 million employees in 2018, and in its employment barometer calculated for Handelsblatt, the Ifo institute forecasts an increase to nearly 45.4 million for this year.

But a lack of skilled workers remains a drag on jobs growth. “Bottlenecks in skilled labor are the biggest risk to the German job market,” said Andrea Hammermann, labor specialist at the Cologne institute.

The balance of all these developments – from the trade war to Brexit to construction and skilled labor shortage – will determine whether 2019 will be Germany's 10th consecutive year of growth, the beginning of a slowdown, or, worse, a downturn.

Donata Riedel and Norbert Häring cover economics for Handelsblatt. Frank Specht reports on the labor market. Martin Buchenau is a correspondent in Stuttgart, and Jan Hildebrand is deputy bureau chief in Berlin. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the authors: [email protected], [email protected], [email protected], [email protected], and [email protected]