Germany's economic woes continue, with the country now facing the danger of ending 2024 in recession, reports Euronews.
On 9 October, German Economy Minister Robert Habeck announced that the economy is expected to contract by 0.2% this year. This is lower than earlier forecasts of 0.3% growth and represents a second consecutive year of contraction.
This bleak outlook makes Germany the only G7 economy projected to contract in 2024, a continuation of the 0.3% decline in 2023.
The decline reflects the country's continuing structural challenges, including its reliance on its manufacturing sector and the adverse effects of global competition, particularly from China.
Hope for recovery in 2025
Despite the gloomy short-term outlook, the German government forecasts that the economy will return to growth in 2025, with gross domestic product expected to increase by 1.1%, slightly higher than the earlier forecast of 1.0%. By 2026, growth could reach 1.6%, mainly due to a rebound in private consumption and a stabilisation of inflation.
However, these projections depend on the successful implementation of structural reforms and the stabilisation of global economic conditions.
According to Habeck, the implementation of a comprehensive package of 49 growth measures is crucial. These measures aim to revive the economy by boosting investment, raising productivity and addressing long-standing structural problems
The economy minister stressed that if this plan is successfully adopted, "the economy will be stronger and more people will return to work", but its success depends on the support of both houses of parliament, including the opposition-controlled Bundesrat.
On inflation, the government has revised its forecasts.
Inflation is expected to fall to 2.2% in 2024 from 5.9% last year, with a further reduction in the coming years and stabilisation to 1.9% in 2026.
These declining inflation rates, along with wage increases and tax cuts, are seen as key to reviving private consumption, which could spur moderate economic growth in 2025.
Structural challenges remain
Germany's economic difficulties are compounded by gloomier forecasts from the ifo institute, which stresses that the country's economy is "mired in crisis". According to the institute, both cyclical and structural factors are weighing on Germany's growth prospects.
"The German economy is stuck and in crisis, while other countries are experiencing an upturn," says Prof. Dr. Timo Vollmershauser, deputy director of the ifo institute.
He attributes the malaise to a combination of factors including decarbonisation, digitalisation, demographic changes and geopolitical shocks such as the energy price shock and China's changing role in the global economy.
Germany's industrial base has been severely affected for a prolonged period, suggesting that the downturn is rooted in structural problems rather than reflecting a temporary cyclical slowdown.
The manufacturing Purchasing Managers' Index (PMI) dropped to 40.6 in September 2024, the 27th consecutive month of contraction, ranking as the second-worst decliner in the world after Myanmar.
This sustained decline, especially in export orders, is unprecedented in recent decades.
Dr Cyrus de la Rubia, chief economist at the Hamburg Commercial Bank, pointed to the so-called "China shock" as a key factor. He noted that sectors such as the automotive and mechanical engineering industries are finding it difficult to adapt to increased competition from abroad.
Corporate takeovers and strategic divestments on the horizon
Amid these challenges, German companies are increasingly turning to foreign buyers to weather the storm, or becoming attractive takeover targets.
Deutsche Bahn, Germany's national rail operator, recently agreed to sell its logistics subsidiary Schenker to Danish rival DSV for approximately €14 billion. This influx of cash is expected to provide much-needed financial relief for Deutsche Bahn, which has struggled with operational inefficiencies and frequent delays.
Meanwhile, Commerzbank, Germany's second-largest private lender, is a prime takeover target from abroad. Italian banking giant UniCredit has discreetly increased its stake in Commerzbank to 21%, prompting speculation that a hostile takeover could be on the horizon.
ECB President Christine Lagarde has spoken out in favour of cross-border bank mergers, saying European banks need to consolidate to compete effectively on the world stage.
Meanwhile, some German companies are moving their investments abroad. BASF, the chemicals giant, is building a new €10 billion plant in China, underlining a growing trend for companies to turn to international markets to secure growth.
The Swiss owners of mid-sized energy services provider Techem recently sold it to US asset manager TPG. This reflects the broader pattern of foreign acquisitions in the German market. | BGNES
