For the German economy, the end of euphoria

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Pour l’économie allemande, la fin de l’euphorie

Two major German business institutes are downgrading their growth forecasts, against the backdrop of concerns about the future of free trade.


In turn, two renowned economic institutes have significantly reduced their growth forecasts for the German economy. In its summer report, published Tuesday, June 19, the IFO Munich corrected the figure it still defended a few months ago.


According to him, growth in Germany should finally reach 1.8% in 2018, and no longer 2.6% as he had previously anticipated. The same is true for the Berlin institute, the DIW, which only sees growth at 1.9% for this year, and 1.7% for next year. The reason for these revisions? The clouds that are piling up on world trade are having a huge impact on "made in Germany". "


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In recent weeks, economists had put into perspective the warning signs that were multiplying. Slowing growth in the first quarter, only 0.3%? Exceptional effects: a consequence of industrial strikes in January, public holidays or the unfortunate epidemic of influenza, which has bedridden German workers, they said in mid-May. Until Destatis announces, on June 7, a new decline in orders of the industry of 2.5%, the fourth in a row. Such a decline had not been observed in Germany since the economic crisis of 2009.


Your alarmist


The forecasters therefore had to admit that there was a reversal of trend. Large institutions now agree that German growth should remain well below 2% in 2018, while it was 2.2% in 2017. "Contrary to expectations, the indicators did not return to what they were last year. In April, industrial production fell sharply and investment in business equipment declined. It is extremely singular in a phase where production capacities are used to their maximum in Germany ", acknowledged Tuesday morning Timo Wollmershäuser, director of the business unit of the IFO institute.


Why such a cautious investment? While economists remain cautious, citing the situation in Italy, there is every reason to believe that current uncertainties are wider. They concern the global evolution of international trade, in the context of a possible trade war between the United States and China.


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At the big German industrial federation, the BDI, the tone is alarmist: "The trade conflict between the United States and China is also dragging Germany into turmoil. We fear a new protectionist spiral ", said Dieter Kempf, chairman of the BDI on Friday, at the announcement of new tariffs between the two major powers. "Our companies have a lot of subsidiaries and commitments in both countries. One in four jobs in Germany is dependent on international trade ", alerted Thursday Volker Treier, economist at the German Chamber of Commerce and Industry (DIHK).


Beyond that, business concerns are about the future of free trade itself. This essential principle of German prosperity, instilled by the United States after the Second World War, has been battered for months. "A lot of confidence in international markets has been lost," At the end of May, Holger Bingmann, President of the BGA Foreign Trade Federation, told the daily FAZ.


"Globalized production chains"


The risk feared by companies is less about the tariffs imposed on one or the other product "made in Germany" than on the existence of entire production chains. "The production of a German car is the result of a global production of multiple parts produced all over the world. These production lines were built over time. They are now threatened, without any precise anticipation to what extent specifies at World Mr Wollmershäuser. Adapting the industry to this change will have cyclical repercussions and may cost us prosperity points. ". As a result, in a rare collective movement, the major industrial federations urgently call for a collective European response.


For the moment, households do not feel the effects of these risks. The steady decline in unemployment and wage increases negotiated by unions in the spring continue to fuel consumption, "An essential engine of growth," says Simon Junker, economist at DIW. Government-mandated cost reductions should help offset the flutter of foreign trade.


But the euphoria phase is probably over for the German economy, much earlier than expected. "Growth will run out of steam. The climax of the expansion phase is probably behind us, " said Mr Holtemöller of the Halle Economic Institute.


Source: For the German economy, the end of euphoria

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