Economics: Is German sluggishness here to stay?

The German economy has lagged behind every other Eurozone member since Q4 2019. Unemployment has risen 0.5% over the past year, and unlike the rest of the Eurozone, Germany didn’t grow at all in Q2 . Domestic demand has been the key source of weakness in recent quarters, with forward-looking indicators suggesting that risks to Germany’s outlook are far more skewed to the downside than the upside.

The good news

First, unemployment of German nationals has barely risen at all, with most of the rise driven by an influx of workers from abroad. With labour shortages holding back production across several industries in recent years, the German economy could stand to benefit once integration issues fade. Second, extreme component shortages and energy issues are likely to have affected industries more in Germany than in other major eurozone economies, hindering German growth. However, its recent turnaround should provide some relief. Third, Germany doesn’t appear as exposed to higher rates as other eurozone economies.

The bad news

New exports orders continue to decline thanks to slowing growth elsewhere in the world. And of course, the ECB’s record-breaking tightening cycle will take its toll. However, Germany’s problems go further that just cyclical, with some structural issues being particularly worrying.

First, like other Eurozone economies, Germany is aging, and quickly. Without an offsetting increase in participation or migration, labour will be a drag on potential growth. Second, the push to disengage from Russian energy could weigh on competitiveness. Third, China’s continued climb up the value chain presents another significant challenge, with the auto industry at the heart of that predicament.

Naturally, ceteris paribus, a weaker Germany results in a weaker Europe; the next few years will be crucial.