German economy: fear of recession and record profits - how do they go together?

War in Ukraine, energy crisis, record inflation, impending recession - the environment is anything but favorable.

German economy: fear of recession and record profits - how do they go together?

War in Ukraine, energy crisis, record inflation, impending recession - the environment is anything but favorable. But the German economy is still growing and quite a few corporations are making billions in profits. Sounds paradoxical, but there are explanations.

How the "economic experts" assess the situation will be discussed by the advisory body of the federal government this Wednesday (9 November) when the annual report 2022/2023 is presented.

Economic growth in the crisis - how does that work?

In the third quarter, the German economy surprised positively: Instead of the decline in economic output expected by many economists, gross domestic product (GDP) increased by 0.3 percent compared to the previous quarter. According to an initial estimate by the Federal Statistical Office, growth was mainly driven by private consumption. The elimination of corona restrictions boosted the business of hotels and restaurants, and the event industry got going again.

How is the mood in the company?

"The decline of Germany as an industrial location is regularly announced," wrote the Bonn economics professor Moritz Kuhn, recently on Twitter. "Just don't give it the data." He considers the trivialization, for example, on Twitter and in talk shows "extremely dangerous," says Kuhn when asked: "They often put rows of numbers next to each other without context and a reference point."

A survey by the Munich Ifo Institute, for example, showed that companies are currently significantly less concerned about their existence than they were during the Corona crisis. According to data published at the end of October, 7.5 percent of companies see their existence threatened. In June 2020 it was 21.8 percent. "In view of the severe economic slowdown, companies are proving to be very robust," summed up Ifo expert Klaus Wohlrabe.

Rapidly rising prices for natural gas, for example, and the difficulties in the energy supply are becoming an increasing burden for Germany's machine builders. According to a survey published in September by the VDMA industry association, around 90 percent of companies have not had any restrictions on production to date.

The Association of German Mechanical and Plant Engineering (VDMA) expects a production increase of one percent in the current year in view of full order books. According to the VDMA survey, three out of four companies expect nominal sales growth in 2022.

Why are some corporations making billions in the middle of the crisis?

"BP in an oil rush", "Crisis? Not at Deutsche Bank", "Lufthansa expects billions in profit" - things are going really well for many companies. The British energy giant BP participates in high oil prices as a result of the Russian attack on Ukraine. Deutsche Bank set the course for growth years ago with a corporate restructuring and is currently also benefiting from rising interest rates. Confidence is growing at Lufthansa, which has meanwhile been supported with state billions, thanks to strong ticket demand and an extremely profitable freight business.

EY partner Mathieu Meyer is not surprised that many companies are on a record course: the order books are full, the purchasing power of consumers after the corona restrictions is high. "And that's how companies manage to push through price increases. The demand side is still quite robust," says the management consultant.

In 2023, falling purchasing power and rising lending rates are likely to cause a downturn. "But I take away from discussions with companies that no complete crisis is to be expected," says Meyer.

What role does the state play?

As in the Corona pandemic, Germany is spending billions to reduce the burden on companies and consumers. Chancellor Olaf Scholz (SPD) casually summed it up when presenting the new so-called protective shield against high energy prices at the end of September: "One can say that this is a double whammy." Even a wealthy country like Germany cannot cushion everything, but this is a stabilizing factor.

What is the situation on the German labor market?

"Overall, the labor market is still robust, and employment in particular continues to grow," said Andrea Nahles, head of the Federal Employment Agency (BA), recently. From September to October the number of unemployed fell by 43,000 to 2.442 million. The unemployment rate improved by 0.1 points to 5.3 percent.

In its monthly report for October, the Bundesbank writes that the demand for labor is still high in many areas: "Across the economy, a significant deterioration in the labor market is not to be expected over the course of the winter months." The state could also stabilize the situation with short-time work benefits.

Is the current situation just something like the calm before the storm?

At least that's how Commerzbank chief economist Jörg Krämer sees it: record high inflation is causing "consumers' purchasing power to collapse." The fact that companies are likely to be reluctant to make investments due to increasing uncertainty also speaks in favor of a contraction in GDP in the fourth quarter.

The Bundesbank's monthly report for October states: "In the winter half-year that has just begun, the downward forces are likely to increase significantly." The Association of German Chambers of Commerce and Industry (DIHK) summarized a survey of over 24,000 companies: "The worst is yet to come".

Uwe Siegmund, chief economist at the insurer R V, prepares for difficult months: "All the warning signs are red. All early indicators show that something is coming. We are assuming a major recession." However, he does not currently expect the downturn to last into 2024.

"The first half of 2023 will hurt. Maybe we have supporting factors that will not happen like that, for example a mild winter and moderate wage agreements," says Siegmund. "One of my greatest hopes is the euro. If the euro were to rise a little more against the dollar, that would make exports more expensive, but it would calm inflation significantly."

Does the crisis also offer opportunities?

Crises are ultimately transformation accelerators, says the Bonn economist Kuhn: "Of course, that increases the costs if we as an economy want to move away from fossil fuels more quickly now. But that's about the same as if I accelerate faster in my car to 100 kilometers an hour: that's it more expensive because I use more gas, but it also rolls faster."

EY partner Meyer sees it similarly: "If you look back, every crisis has tended to strengthen the German economy. When you're in it, it's uncomfortable. But if you use the crisis wisely, you can certainly emerge stronger from it."

The head of the KfW development bank, Stefan Wintels, also sees potential for Europe's largest economy in the restructuring that is now necessary, for example in the energy supply: Many local companies have technologies to support other countries in the green transformation. Wintels' conclusion: "This is a huge opportunity for many German companies."