Germany’s economy is facing a perfect storm

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Germany’s economy is facing a perfect storm
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If anything, it’s amazing that Germany’s economy is doing as well as it is.

Today’s IFO survey is a wakeup call on the state of the German economy. The business climate survey fell to 88.4 from 91.5, which was worse than expected.

The German economy is already in a technical recession and the IMF expects GDP to stay near zero this year before gradually strengthening to 1% next year but that may be overly optimistic. IFO sees a 0.4% decline this year.

The very foundations of the German economy are in question. It’s a manufacturing powerhouse but the sustainability of that model depends on cheap energy and we’re already seeing energy-intensive factories shut down. Equally concerning is the rise of the Chinese automotive industry.

China is winning the EV war.

That’s setting up an identity crisis for the German economy that would be worsened if the euro ever got off the floor.

One of the areas they’re pushing towards is the green transition but that’s run into heavy US subsidies via the IRA.

In addition, the war in Ukraine is naturally creating a drag on consumer confidence and there’s no end in sight to the conflict.

Finally, eurozone fiscal rules are looming headwind for the entire region. Germans have been the hardliners of the rules around achieving deficits of less than 3% of GDP to the ire of Spain, Italy and Greece. Those rules have been suspended since the pandemic but could be reactivated next year, leading to austerity throughout the eurozone, and the potential political instability that comes with it.

Speaking of that, Germany’s far-right AfD won a vote to become a district leader for the first time as the party polls at record highs.

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