Economy: German economy facing a long phase of weakness

Economy: German economy facing a long phase of weakness

Pandemic, inflation and the Ukraine war have plunged the German economy into crisis. But even without these shocks, Germany would grow more slowly, predict economic research institutes.

According to prominent economists, the German economy is facing years of weak growth. The German Institute for Economic Research (DIW) in Berlin, the Kiel Institute for the World Economy (IfW), the Leibniz Institute for Economic Research (RWI) in Essen and the Ifo Institute in Munich all assume that the annual growth rates will be below one in the medium term percent will be – and thus much lower than the average of the past thirty years.

“Economic growth in Germany is likely to be significantly weaker in this decade than in the supposedly economically successful 2010s,” said DIW President Marcel Fratzscher. “The weakening of Germany’s economic potential is due to its own failures and has little to do with the war in Ukraine or the corona pandemic.”

Fratzscher: Growth potential could drop even more

According to him, potential growth for the German economy is likely to fall below 1.0 percent in this decade. This is mainly due to the decline in employment due to demographics and a shortage of skilled workers, said Fratzscher. “If the dormant transformation should lead to de-industrialization, then the growth potential could drop even more.”

Germany has made four major economic policy mistakes in the past 20 years. The DIW President criticized the “failed ecological transformation so far, which has led to Germany being far too dependent on fossil and very expensive energy imports and having overslept the technological transformation to sustainable and innovative technologies,” as the greatest failure.

The second mistake is excessive bureaucracy and vested interests, which hamper private investment. “The third mistake is the state investment deficit, which has meant that the German state has been living off its substance for a long time.” Fratzscher mentioned a deteriorated education system and inadequate infrastructure. According to Fratzscher, the problem of skilled workers as the fourth weakness will become much worse in the coming years and pose an existential threat to numerous companies.

Kooths: Not the end of the road yet

At the IfW Kiel, Vice President Stefan Kooths says: “Over the past thirty years, we have had an average annual growth rate of 1.4 percent.” The medium-term projection of the IfW shows a decline to below 0.7 percent by 2027.

“It’s not the end of the road,” said Kooths. “That means: What we were used to in the past decades will shrink to a third within a relatively short period of time. The reason for this is the demographic development.” An old society is typically less able to adapt new technologies. “That could again mean a discount on productivity development.”

In addition, Kooths expects that the switch to a climate-neutral energy supply will cost companies large sums of money. Therefore, even the clear revision of the growth figures is “rather an estimate at the upper end”. Germany is also “running into significant distribution conflicts because the baby boomer generation is retiring,” said Kooths.

At RWI Essen, the assessment is very similar: “The crises of the past two years have weakened the growth of the German economy, but it would have slowed down in the coming years anyway,” said economic chief Torsten Schmidt.

Schmidt: The main reason is the decline in the labor force potential

According to the RWI’s medium-term projection, growth in production potential is likely to decline from 1 percent this year to 0.6 percent in 2027. “The expected growth rates for gross domestic product are likely to fall accordingly,” said Schmidt. “The main cause is the decline in the potential labor force.” Schmidt also mentions the high costs of saying goodbye to fossil energy: “But we also assume that the restructuring of the capital stock necessary to achieve the climate policy goals will dampen the increase in production potential.”

The Munich-based Ifo Institute expects growth rates in German economic output to be between around half a percent and three quarters of a percent by the end of the decade under normal circumstances. “Even without the various crises, the German economy would face a slower or weaker growth path,” said Ifo economic researcher Robert Lehmann.

Lehmann: Digitization mitigates some of the burden

The baby boomer generation is retiring from the workforce. Since fewer people are moving up into working life, the retirement of older people can no longer be compensated. “This means that the shortage of skilled workers that is already being observed will increase even more noticeably in the coming years.” Lehmann sees expensive energy as an additional obstacle.

The economic researcher does not want to paint it black: The corona pandemic could also result in opportunities or have already grown. As an example, Lehmann cited the accelerated digitization, “which can at least partially alleviate the burden of demographic change.”

According to Lehmann, demographic change and weaker growth could also fuel inflation: “In the transition phase, when the baby boomers retire, consumers and their spending mood initially remain quite stable. Rather, it may also be that the high savings of the then living generation of pensioners will lead to a significant increase in consumption.” However, production opportunities and economic growth would be lower. “Both can lead to significant price increases in the medium term.”

Source: Stern

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