Germany’s domestic strength belies prospect of a recession
The spectre of recession is stalking German boardrooms — but Berlin-based building firm K Rogge Spezialbau can barely keep up with demand.
Figures published later this week are expected to show that German gross domestic product contracted for the second quarter in a row, confirming that the country is in recession. Exporters are suffering and industrial production has been in decline for a year and a half. But the domestic economy is in rude health.
K Rogge is typical of the continuing strength of Germany’s services industry. With Berlin in the grip of an extended building boom, its order backlog stretches into next summer. Its stucco plasterers, renderers and fitters have rarely been so busy.
Low interest rates are prompting millions of Germans to invest in real estate, said Klaus-Dieter Müller, the company’s head of stucco works, and “the whole construction industry is benefiting — us included”.
That contrasts with the experience of Continental, the German automotive supplier. In September it warned of an “emerging crisis” in the auto industry and unveiled plans for a massive restructuring that would put 20,000 jobs at risk worldwide.
Continental is not alone. German exporters are being hurt by the US-China trade conflict, Brexit uncertainty and a big drop in auto production, down 9 per cent in the first 10 months of the year. Industrial weakness was a key reason for the 0.1 per cent contraction in German GDP in the three months to June.
Yet the overall picture is mixed. German industrial production shrank by 1.3 per cent in September, while output in the construction industry rose by 1.8 per cent.
Germany’s Council of Economic Experts, which advises Angela Merkel’s government, last week said there was a “dichotomy” in the data.
“While industry is in recession, the service sector has up to now been robust,” they said. Record high employment and a rise in disposable incomes were “supporting consumer demand”.
Jens Ulbrich, chief economist at the Bundesbank, said Germany now has “a two-speed economy”.
“The divergence between domestic and export sectors is quite striking,” he said.
Yet economists fear the two will ultimately converge again, if the industrial malaise ripples out to infect other sectors.
“The longer the weakness in industry persists, the more likely it is that it will spread to the whole economy,” the panel of experts warned. The first signs of a wider downturn are already beginning to emerge, they said, with unemployment plateauing and a decline in the number of vacancies being advertised.
“Companies’ expectations in the service sector have also deteriorated,” the panel said.
In its latest outlook, IHS Markit said business confidence across the German private sector had slipped to its lowest level since the global financial crisis. Output of goods and services is expected to fall slightly over the next year, while companies have signalled their intention to cut workforce numbers for the first time in 10 years, IHS Markit said.
“German business expectations have fallen off a cliff since the summer,” said Phil Smith, the data group’s principal economist. “Germany is looking like the sick man of not only Europe, but globally as well.”
K Rogge Spezialbau has hitherto proved immune to the downturn — but that could change, Klaus-Dieter Müller acknowledged.
“Germany lives from its exports, and when they, and the car industry, run into trouble, that can affect economic growth and domestic demand,” he said. “And when that suffers, it inevitably has a knock-on effect on construction, which is very sensitive to changes in the economy, both positive and negative.”
Isabel Schnabel, a member of the economists’ panel and Berlin’s nominee to join the ECB’s executive board, said there was a lively debate on the council about how entrenched Germany’s downturn will be and how to respond. Some economists have argued for a fiscal stimulus to pre-empt a more severe contraction.
“In real time you can never say what part is cyclical and what part is structural, so you have the danger of doing something that ends up being procyclical,” she said.
The Bundesbank’s Mr Ulbrich said calls for government action are misplaced. “Why would you argue for a large discretionary fiscal stimulus in an economy with high capacity utilisation?” he said.
But others say ministers must act now to head off the threat of a deeper recession. Eric Schweitzer, head of the Association of German Chambers of Commerce and Industry, said there were already signs that the downturn was spreading, “leaving its mark on industry-related services and wholesalers”, and called on the government to “act urgently” by reforming corporate taxation and investing more in infrastructure.
But officials have so far rejected calls for a stimulus. Olaf Scholz, finance minister, insists that Germany’s economic prospects remain bright, despite the bad news from manufacturing.
Speaking late last month he predicted the situation for exporters will improve markedly as soon as the US and China call a truce in their trade war and Brexit is sorted out.
“A large part of the slowdown in global growth is due to trade conflicts which could be resolved,” he said. “Every week we receive news that an agreement is coming.”
Optimists point to a few positive data points in recent days: German exports increased by 1.5 per cent in September and new manufacturing orders were up by 1.3 per cent in the same month.
Even if Thursday’s figures do show a marginal contraction, Andreas Scheuerle of Deka Bank argued that it may not amount to a real recession.
“The overall decline is too small for that and isn’t spread broadly across all sectors,” he said. “You could say that Germany will get off with a black eye.”