Europe's Locomotive

Warning Signs on the Horizon for Germany’s Economy as Growth Slows

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A worker at a construction site in downtown Berlin.
  • Why it matters

    Why it matters

    Despite some positive economic signs, the outlook for economic growth in Germany is relatively poor.

  • Facts

    Facts

    • Economists are revising their growth forecasts for 2014 downward, as industrial production has declined.
    • Small business owners are cutting back on investment, according to a survey obtained by Handelsblatt.
    • Slow growth in the first two quarters is likely to weigh down overall results for the year.
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    Audio

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The German economy is actually in relatively decent shape. Gross domestic product, or GDP,  is expected to have increased by three quarters of a percent in the first half of the year. Consumer confidence is at record high levels and the labor market is relatively stable, with a seasonally adjusted 57,000 fewer people out of work in late July than at the beginning of the year.

Thanks to abundant tax revenues, the government is making do without new debt. In the first half of 2014, German federal and state tax revenues increased by 2.5 percent over the same period last year, despite €2 billion ($2.7 billion) in fuel-rod tax reimbursements to nuclear-power producers.

Still, there are growing concerns about the German economy. Government economists have been tight-lipped. No one is willing to discuss crisis scenarios, and bank economists are starting to back away from their economic forecasts. Deutsche Bank, for instance, only expects to see 1.5 percent growth for the entire year, despite a strong start in the first quarter.

“The German economy has a summer flu. It's unclear how serious the condition is, and how long it will last.”

Marco Wagner, Commerzbank

The trend is clearly pointing downward. The Ifo Business Climate Index has declined three times in a row. Industry has seen only modest order volume and, contrary to expectations, industrial production failed to bounce back in June. Production in June, adjusted for seasonal effects and price changes, increased by 0.3 percent over the previous month, and average growth in the second quarter was 1.5 percent below first-quarter levels.

While industrial production fell by 1 percent, there was a 5.8-percent decline in construction. “The German economy has a summer flu,” said Marco Wagner of Commerzbank. It’s unclear how serious the condition is, and how long it will last.

Because German industry has been especially hard-hit by the slowdown, many economists even expect to see a slight drop in economic output in the second quarter. The Federal Office of Statistics is releasing the figures on Thursday.

According to the Federal Ministry of Economic Affairs, June was the first month since February in which industry, the construction sector and energy utilities had seen growth over the previous month. Nevertheless, the 0.3 percent increase wasn’t enough to offset the most recent declines. Besides, the miserable volume of incoming orders in June does not bode well. On Wednesday, the economy ministry reported a 3.2-percent decline in industrial orders.

Optimism is also waning among small business owners. According to a business survey of 7,500 small businesses conducted by the Association of German Chambers of Industry and Commerce and made available to Handelsblatt, companies with fewer than 10 employees are cutting back on investment, primarily in anticipation of rising labor costs.

“In many sectors, such as taxis and cleaning services, smaller companies are revising their personnel planning downwards,” said Achim Dercks, deputy chief executive of the business group, known as the DIHK. “A shortage of skilled workers and rising labor costs has dampened confidence.” Small businesses will be especially hard-hit by Germany’s new minimum wage law and a reduction in the retirement age to 63.

Economists are now pinning their hopes for the domestic economy on the second half of the year, hopes that are bolstered by a secure job picture and wage increases. According to the Institute for Labor Market Research (IAB), there were 1.06 million job vacancies nationwide in the second quarter, almost 14 percent more than a year ago. On the other hand, there are also 2.9 million registered unemployed people.

Translated from the German by Christopher Sultan

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