FOR MOST of the past decade Germany has been a shining exception to Europe’s economic weakness. But a series of recent figures indicate the mighty Teutons might be in serious trouble. After the economy contracted by 0.2% in the third quarter of last year (see chart), industrial production declined by 1.9% month-on-month in November, much worse than the expected growth of 0.3%, prompting fears that the country was about to enter a technical recession. The federal statistics office said last week that German GDP grew by only 1.5% in 2018, compared with 2.2% in 2017, and stated that economic growth “has lost momentum”. Business confidence is flagging. And on January 21st the IMF revised its forecast for German growth to just 1.3% this year, down by 0.6 points from its prediction in October, the biggest downward revision of any major economy. The fund cited weak consumer demand at home and abroad, and the introduction of stricter fuel-emission standards for carmakers that temporarily slowed production.
The weakness of Europe’s economic giant has many outside Germany worried. But economists and entrepreneurs inside the country are reacting stoically. “The underlying fundamentals are still rock solid,” says Holger Schmieding, chief economist at Berenberg, Germany’s oldest private bank. Germany has excellent skilled workers, top-notch engineers, hardly any unemployment, rising wages and stable politics. Alain Durre of Goldman Sachs insists that “concerns about a recession are overdone” because much of the weak performance in the third quarter of last year can be explained by one-off events such as the low water levels of the Rhine, which prevented bigger boats from navigating the river that runs through Germany’s industrial heartland, cutting off factories from raw materials and slowing down the distribution of goods.
This sentiment is echoed by some manufacturers. Werner Utz, chairman of Uzin Utz, a maker of flooring products in Ulm, says he remains optimistic. The order books of his family company, which exports 60% of its turnover, mainly to other European countries, are full for this year and next year. Karl Haeusgen, the boss of Hawe Hydraulik, a maker of hydraulic pumps, which exports 70% of its turnover, is also upbeat about prospects for the coming year even though Hawe’s main export markets are China and America. As a supplier of builders, Hawe is profiting handsomely from China’s Belt and Road Initiative, which involves China underwriting billions of dollars’ worth of infrastructure linking itself to the rest of the world.
Exports are equivalent to almost half of Germany’s economic output, which means that the country is much more dependent than other big economies on trade. (In France and Italy, exports are equivalent to 31% of GDP.) According to Ralph Wiechers of VDMA, the trade body representing machine manufacturers, its members are deeply unsettled by the risk of an escalating trade war between America and China (Germany’s top and third export markets respectively). They also fear Brexit (Britain is Germany’s fourth-biggest export market), the restless mood in France and the unpredictable populist government in Italy (Germany’s second- and sixth-largest export markets).
Trade tends to dry up in such uncertain times, warns Domink Lucius, chief financial officer of Fr. Meyer’s Sohn, a sea-freight forwarding company. With the Chinese economy last year growing at its weakest pace in a decade, Chinese imports from Germany dwindled by 9% quarter-on-quarter and by 24% month-on-month in December, according to Bank of America Merrill Lynch. As a result of this decline, Fr. Meyer’s Sohn is expecting no growth in its business this year, and is also considering selling its British business. Germany’s small and medium-sized companies, the Mittelstand, are the backbone of the economy. But, as the latest numbers make all too clear, their fate rises and falls with the state of the global economy.