Budget verdict: “Things are going to be tough for Germany”: The economy will only find it difficult to get out of a weak phase

The German economy cannot find its way out of the doldrums.

Budget verdict: “Things are going to be tough for Germany”: The economy will only find it difficult to get out of a weak phase

The German economy cannot find its way out of the doldrums. The Federal Constitutional Court’s budget ruling is causing additional uncertainty. In the third quarter, consumer restraint and the weakness of the global economy slowed down Europe's largest economy. Gross domestic product (GDP) fell by 0.1 percent compared to the previous quarter after price, seasonal and calendar adjustments. The Federal Statistical Office confirmed an initial estimate on Friday. Economists and the federal government are also expecting a decline in economic output for the year as a whole.

“Things are going really bad for Germany right now,” said Thomas Gitzel, chief economist at VP Bank. Impetus from the state is urgently needed. "But with the Federal Constitutional Court's ruling, the government's austerity measures could lead to an additional dampening of growth."

According to ING chief economist Carsten Brzeski, the ruling has revealed two new risk factors for the German economy: fiscal austerity and political uncertainty. Together with other factors such as increased interest rates, it is difficult to imagine an early end to the economic stagnation in Germany.

After the Federal Constitutional Court accepted the reallocation of 60 billion euros in Corona loans for climate protection and the modernization of the economy, savings efforts are underway in Berlin.

At least the mood among companies improved in November. The Ifo business climate index rose for the third month in a row. “The German economy is stabilizing at a low level,” said Ifo President Clemens Fuest.

The continued high inflation continued to burden consumers in the summer. They can afford less for their money. Many people are limiting their consumer spending. In the period from July to the end of September, private consumption, which is a key pillar of the German economy, fell by 0.3 percent compared to the previous quarter. The annual inflation rate was 3.8 percent in October after 4.5 percent in September and 6.1 percent in August. Food prices also rose above average in October.

In addition, the German export industry is feeling the effects of the weakness of the global economy. Exports failed as a growth engine in the summer. Overall, 0.8 percent fewer goods and services were exported than in the second quarter. The headwind also comes from increased interest rates. These are depressing demand for construction services, among other things. Incoming orders in the construction industry in the first nine months, adjusted for price increases (in real terms), were 5.6 percent below the level of the same period last year.

According to the information, positive impulses for the economy came from companies' investments in equipment (plus 1.1 percent), for example in vehicles and machinery, in the third quarter.

“After the weak development in the first half of the year, the German economy started the second half of 2023 with a slight decline,” explained Ruth Brand, President of the Statistics Office. Economic output stagnated in the first quarter, but there was mini-growth of 0.1 percent in the second quarter.

According to the Bundesbank's assessment, it will be difficult for the German economy to emerge from the weak phase that has lasted since the beginning of the Russian war of aggression on Ukraine. Economists and the federal government expect economic output to shrink by 0.4 to 0.6 percent in 2023 as a whole before picking up again in 2024.

“Rising real wages with stable employment will allow the wage bill to rise noticeably in real terms in 2024 and give private households an increase in purchasing power that they can use for consumption,” expects KfW chief economist Fritzi Köhler-Geib. Next year, the German economy is expected to return to moderate growth of 0.6 percent.

However, the Advisory Council for the Assessment of Overall Economic Development does not expect any major jumps in 2024 either. Private consumer spending has recovered and the average inflation rate will fall to 2.6 percent, according to the “Economists”. However, the global economy - especially in China - is only gaining momentum slowly. This is putting a strain on the export-oriented German economy.