Germany was among the top five most competitive uh Global economies right now Germany ranks somewhere around uh number 20 so Germany has lost International competitiveness the German governments over the last decade have simply missed the train to invest in the economy and to modernize the economy in the good times now they will have to do it in the bad times Germany's economy is now expected to shrink for the second year in a row that's the glum news from the German economy Ministry out this afternoon previously the government had expected growth for 2024 up n. 3 per but the new estimate shows a contraction of null. 2% for more we're joined by carsten breesy Chief Economist at ING Germany carsten were you surprised by this news no in all honesty not really um because I think now the government is the last one in a long uh series of Institutions revising downwards their growth forecast for this year and it shows again that you know some institutions were simply too optimistic at the start of this year hoping um more than analyzing and really seriously predicting this recovery for uh for 2024 but I think now it's really that the reality check had been a very hard one over the summer and now the government is simply you know acknowledging the fact that Germany is once again stagnating once again the growth leard of Europe so what caused this real ity check because that initial projection for this year was already not super optimistic only 0.
3% plus now we're looking to be back in the negative so how did this reality check come to pass yeah I think you know at the start of the year um many people thought that there would be more demand coming out of the US coming out of China for for German Goods um know the the American case yes I think H held held up but Chinese demand has clearly disappointed uh when it comes to the German economy that is one thing the other thing that that many more optimistic forecasters had been banking on was the return of the German consumer um with the real wages growing the fastest Pace in a decade there were there was hope that we would see private consumption really picking up but we haven't because instead we see that there is a lot of precautionary savings going on in in Germany and German consumer simply holding back consumption that is one thing that's the cynical component but you also have the structural comp component and that was something that the government I think has been now underestimating for for a couple of years in a row and and this structural component means Germany has lost International competitiveness Germany is facing a system rival in China and uh and Germany is simply not as strong anymore structurally as it used to be a decade ago let's compare Germany to some of the other top economies around the world looking at IMF predictions for this year and combined with the information we have today from the German economy Ministry here's how Germany is expected to stack up against the US China Japan and India those projections there yet again it is expected to be the only economy to contract of those five basically a repeat of what happened in 2023 as you can see here carsten uh that looks pretty bad how badly is Germany lagging behind the rest of the world's top economies far um when you look also at International competitiveness rank ings Germany 10 years ago when we were celebrating or enjoying V wunda 2. 0 um Germany was among the top five most competitive Global economies right now Germany ranks somewhere around uh number 20 so Germany has lost International competitiveness and that is exactly what is now reflected in these growth numbers it is not to say that Germany is completely different than the rest other countries other developed economies also do have a big industrial production sector other count are also depending on export um but Germany I think is the most exposed to what is currently going on in the global economy namely that there is geopolitical uncertainty that energy prices are no longer stable and certain that the role of China has changed and this is clearly what what is hitting um the German economy the most plus homemade um the German governments over the last decade have simply missed the train to invest in the econ economy and to modernize the economy in the good times now they will have to do it in the bad times as I was looking at some of the economies just under this top five it had me wondering if Germany's at real risk of slipping down the L of the list of these top economies is there a risk of the economy shrinking in a real way oh definitely there is um because in the end what what does it mean that you are a highly competitive economy what does it mean that you're a highly Innovative economy it simply means you very well-paid jobs um you are really on on on top of the ladder of of the supply chain of the production chain so if Germany now continues to drop on this ranking in competitiveness if it becomes less Innovative it might very well be that the labor market remains relatively stable because we also have demographic change um but the jobs that Germany will have will be lower paid than before and this is a gradual decline of call this economic wealth welfare um of economic prosperity and that is what we're currently witnessing it it is not as painful as a financial crisis or a pandemic in the short run because it is more gradual it is more silently coming in but that is what we're currently witnessing are the challenges facing Germany here unique or is this more of a a self-imposed error well we you you need to make a distinction here so Germany has you know the the global factors are also affecting other developed economies Germany is not the only country being dependent on industrial production Germany is not the only country being dependent on automotives for example um Germany is not the only country facing Chinese competition but the the order of magnitude the size by which Germany is facing these challenges is unique and uh is probably the biggest the largest one compared with other um um developed economies then you have the homemade part and there Germany is also unique unfortunately um because Germany has simply Miss and forgotten to invest when you look at the German investment ratio over the last 10 years it has clearly been one of the lowest in Europe so Germany forgot to invest in digitalization in infrastructure in education and now with these very weak GDP growth forecasts it is paying the price for it we've talked a little bit about energy prices already that's a refrain we hear here in Germany quite a bit but Germany is not the only country dealing with high energy prices so what's really going on here no Germany is not the only country dealing with high energy prices but Germany is the only country which uh exited nuclear um energy without having already a very solid alternative so Germany also forgot to really invest in the alternative being renewable energies that is one thing what is also going on is and there is not so much High Energy prices it is energy price stability and also energy Supply stability and we currently witness that many companies are complaining about uncertainty uh uncertainty about where will Energy prices be next year in two years in five years from now as a result of the the the green transition but they're also worried that um there might not be enough energy Supply um and I think the these two kinds of uncertainty are holding back investments in Germany itself lack of workers is a storyline that has been floated by Business Leaders here in Germany with a story I read recently that the Berlin Chamber of Commerce and Industry even going as far as Namibia to try to train and recruit workers what role do you see a lack of workers playing here well the lack of workers clearly means that the supply side of the economy is limited that we do have these supply side constraints um and and and you see it everywhere what what does this mean supply side constraints it simply means that you won't get a service 247 uh you know go to a store you could go to a restaurant these days and you will see a witness that sometimes they don't offer lunches anymore but they only open for dinner times um if a factory doesn't have enough enough workers they will have to cut down the production so the these are the supply side constraints that are clearly hitting the German economy and what is even worse is that this is just the tip of the iceberg so the demographic change has only just started over the next five years we will see I think five to seven million Germans leaving the labor market because they will get their well-deserved pension and retirement um so this this problem of the lack of qualified workers is only getting worse and yes Germany needs some kind of immigration or Germany goes fully into automation that is the other the other alternative so you know fill a vacancy with a robot um but um so this this is clearly a challenge and this will hamper the growth potential of the German economy over the next couple of years Carson last time we spoke we talked about the German car industry and it it made me wonder is it just the leing car industry that's putting the brakes on the German economic recovery or is there a bigger question question about the entire German industrial output right now there there is a big question mark um behind the entire German industrial production I think the automotive sector is the the most prominent one and the automotive sector is maybe also the most symbolic one but other parts of Industry are are suffering from the same problems namely the cost positions are increasing the energy uncertainty is also undermining cast positions then on the other hand there is Chinese competition because it is not only in the automotive sector that that the China is competing now with with Germany um in fact we also have it in other industrial sectors um so so this is clearly what what is currently happening and when you look Beyond China we also see that at least with with this with the pandemic or at the latest with the start of the the war in Ukraine the global economy has has changed we will see more Del global ization or reglobalization so we will see that that the global trade is changing whether in net terms it's going to be less or more we don't know yet but this means that you know German companies across the entire industrial Spectrum um that have been so dependent on exports also need to rethink their supply chains need to rethink their export destinations and rethinking and possibly restructuring also means higher costs more money um and and this is I think what is currently holding back industrial production in general a shrinking economy can mean uh risk adverse companies and and consumers it can also mean less tax revenue for a government all of that can mean less investment so it just has me wondering are we at risk of some kind of economic Doom Loop here it depends in in all honesty Germany remains so let's say to to escape a little bit from the gloom and doom story Germany is still a high developed economy Germany is still an economy with a lot of potential with highly skilled people here and uh you know and a good starting position look at Japan for example Japan has been in a de facto stagnation for for two decades in in a row so the only difference now between the Japan of the last 20 years and the Germany right now is that Japan saw its government debt increase significantly so the question for Germany will be um you know yes stagnation is okay well you you might be able to live with it if if a government is willing to for example um come up with more social transfers um come up with more Investments and is is willing to um to absorb the uh the negative consequences that stagnation can have on a society and on an economy via higher debt but the combination of a stagnating economy and a debt break is unique the German economy Minister has hinted at a proposed growth initiative what could that look like well we we have had couple of growth initiatives yet and the problem of the current German government is not so much the lack of ideas or the lack of good ideas actually but um the implementation uh even when you when you look back at the Coalition agreement when the current government started it Tak many good economic policy boxes um this growth initiative is currently being talked about and that the government at least agreed on this summer um is a combination of mainly structural rep uh reforms think of a reduction of bureaucracy a reduction of red tape um trying to bring incentives for companies to invest in the construction sector in new technologies in in green technologies um so this is this is all good stuff um re re coming up or to improve the the structural or the structures of the German economy the only problem with this growth initiative is that currently there is still a only a very small price taag on it and that is I think we talk about something like 7 to 10 billion Euro sounds big but for an economy of the size of 3,700 billion Euro this is nothing and uh and therefore the direction this growth initiative is taking is a good one but the size uh is is clearly too little um so what Germany would need is indeed go into this direction of structural reforms reduce bureaucracy um bring in new incentives to invest but also put in more money so you know digitalization education infrastructure these are all public goods so there is no way around it that the government will have to invest in in these areas um that is clearly one one thing that that we need to see um and and and the other thing is also you know how can you reduce bureaucracy by for example investing in egovernment so there you won you won't get Germany again flourishing Germany returning to AA 3. 0 without Investments structural reforms alone will not do the trick in uh all this Doom and Gloom that we've been talking about there was a h hint of optimism from the German economy Ministry for 2025 but do you think Germany's well positioned there or is this more misplaced optimism I a bit afraid that this is the the typical optimism we see from by by forecasters made that next year everything will be fine again because in order to get to this growth rate of around 1% it actually means that the German economy would have to return to something like potential growth very quickly I think first or at the latest second quarter of 2025 and I don't see this happening because I think what the mistake is um with predicting around 1% growth for next year is that it is still underestimating the structural weaknesses of the German economy so in order put a turnaround in order to see the German economy again growing with something like 1% or even more we need to see structural reforms we need to see structural Improvement because currently in in this current structural shape I think a potential growth rate a structural growth rate for Germany is rather 0.
