Following the recent data revision by the Office for National Statistics (ONS), the UK is estimated to have performed significantly stronger than initially thought in the aftermath of the Covid-19 pandemic. The ONS now estimates that the UK economy in Q4 2021 was 0.6% larger than two years earlier before the start of the pandemic. As many have pointed out, this means that the UK economy has performed about as well as France in the post-pandemic period and noticeably better than Germany. Indeed, we estimate that in Q2 2023 the UK economy was at least 1.2% larger than in the last pre-pandemic quarter while the German economy has grown by just 0.2% over the same period.
One should be careful regarding the interpretation of such rankings. As pointed out by Cebr Deputy Chairman Douglas McWilliams, future revisions among EU countries are also likely. Nevertheless, it is difficult to find much optimism regarding the German economy currently, leading to the resurgence of the ‘sick man of Europe’ moniker. Data released on Thursday showed that German industrial production contracted by a stronger-than-anticipated 0.8% in July, the third successive monthly decline. Things don’t look any better when looking at the economy as a whole, given that German GDP hasn’t recorded positive growth since Q3 2022. Soft indicators, such as the Purchasing Managers’ Indices, show sharp declines as well, though their correlation with economic activity has not been clear in recent months.
The challenges facing the Germany are not unique, but due to the structure of its economy, the country is being hit harder than most. Traditionally, German manufacturers have helped to drive growth in the country, producing both for the domestic and the international market. However, the surge in energy prices following Russia’s invasion of Ukraine means that energy-intensive industries such as chemicals, steel or glass, have found it difficult to produce at competitive cost levels in Germany. High energy prices for industry are also an issue for producers in other countries, including the UK, but Germany’s economy is still far more dependent on the fate of big industry. Fears of a process of deindustrialisation have led to calls for a subsidised energy tariff for businesses to keep industrial players from fleeing the country. Needless to say, the decision by policy makers to shut down the remaining German nuclear power stations at such a critical time has not been helpful.
Aside from high energy costs, German manufacturers are also struggling with a downturn in the global economy and in particular in China, one of Germany’s most important trading partners. Chinese buyers snap up between a third and two-fifths of all German cars produced every year, underlining the importance of the Chinese markets for VW, BMW, and Mercedes. However, China’s automotive industry is catching up fast and has the lead when it comes to selling electric vehicles, a technology that German carmakers have been late to adopt. In Q1 of this year, BYD, a Chinese company, sold more cars in China than VW – the first time in 15 years that the German car giant hasn’t occupied the top spot.[1]
Lastly, Germany– as with most other developed economies – faces the demographic challenges associated with an ageing population, leading to a projected increase in spending on benefits and healthcare while exerting a squeeze on labour supply.
The concerning bit for German policy makers is all these issues are not cyclical, short-terms problems that are likely to correct themselves after a few rough quarters. More so than other countries, Germany needs to ask some more fundamental questions regarding its growth model for the future, including how it can maintain its edge as a manufacturing powerhouse while at the same time decarbonising its energy grid and weaning itself off cheap Russian gas.
The good news is that Germany remains an economic giant – even under a scenario where GDP growth would only be half of what we forecast in our latest WELT report from December last year, it would still maintain 5th position in our World Economic Leage Table by 2037, ahead of the UK even, though by a smaller margin (14% larger GDP in US$ vs 23% under our forecast from WELT 2023). Public debt is low compared to its European peers, meaning it has enough dry powder for a more ambitious industrial policy and to support its businesses and citizens. This would also be in the interest of the UK as a weaker Germany will mean even less demand for British exports, which have struggled to find their feet in the current post-Brexit trade arrangements.
For more information, please contact:
Kay Daniel Neufeld, Director and Head of Forecasting and Thought Leadership
Email: kneufeld@cebr.com, Phone: 020 7324 2841
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.