The federal government’s annual economic report does not contain any concrete course corrections. The outlook for the German economy is becoming darker.
Uncertain consumers, poor business, slow investments. There is little to be said about Germany’s current economic weakness. The federal government’s annual economic report confirms what was to be expected: with a mini-growth of 0.2 percent, the German economy will not get off the ground in 2024. The coalition partners largely agree on the analysis of the weaknesses. Not so in the impulses that should be taken against it. The differences are glossed over in the report.
The economic report fails to provide a signal of departure demanded by business associations. The government warns that a lot needs to be done to increase the potential for renewed growth. In 2025 the economy could pick up again with one percent growth. An end to the economic weakness is therefore not in sight in the medium term.
The reasons include, among other things, the demographically-related labor shortage, the energy-intensive industry that is overly dependent on Russian gas and also geopolitical risks. “All of this leads to considerable pressure for Germany to adapt as a business location,” it is said, because these are structural and long-term developments.
Robert Habeck: “Boost reforms”
Two years after the start of the war in Ukraine, Federal Minister of Economics Robert Habeck defended previous defensive measures in favor of the economy. There is already an existing reform booster, but it needs to be further activated, according to his core message. “We are not defenseless,” said the Green politician to the press. “We have to boost reforms with an attitude of acceptance,” he said, referring to the coalition partners SPD and FDP. He primarily mentioned the reduction of bureaucracy, (even) faster government decisions and cheaper implementation in international comparison as “boosters”.
At the same time, Habeck dampened expectations of concrete steps. The annual economic report lays a foundation for this, it is the basis for what needs to be worked out now – for example with the collective bargaining partners at the round table, where the questions are about working longer in old age or more flexibility in working life.
Annual economic report: Concrete measures are missing
It is no secret that Habeck and Finance Minister Christian Lindner (FDP) disagree about the necessary countermeasures. Both see the competitiveness of Germany’s companies at risk, among other things because they are burdened with higher taxes and energy costs than in other countries.
While Habeck relies on “homework” and wants to tackle the weakness with faster de-bureaucratization and a revival of the labor market – a shortage of skilled workers is seen as one of the brakes on growth – Lindner is bringing a “dynamization package” into play that is intended to relieve the burden on companies across the board. for example through lower costs for energy and bureaucracy, or through lower taxes.
In the second half of the legislative period, the focus in the Ministry of Economics will also shift more from climate change and the energy price crisis to increasing growth. Nevertheless, according to local understanding, tax deductions for companies should, if possible, be linked to efforts towards a green economy. “Transformation” remains the common thread.
The FDP, on the other hand, would like to abolish the solidarity surcharge for companies, i.e. create relief with a watering can. Habeck proposed a new special fund to finance tax relief. Lindner, in turn, rejects debt financing.
176 pages report
Under the motto, we now focus on various fields of action to dynamize Germany as a business location. Structural change could increase prosperity if resources tended to move from less to more productive areas. This supply policy takes into account location factors that have proven to be a brake on growth: including bureaucracy, a dwindling supply of workers, the loss of cheap energy sources, inadequate infrastructure, hesitant digitalization, a shortage of affordable housing and a “sometimes high burden of taxes and duties”.
Without going into possible relief, it is only stated: “The burden on corporations in Germany is very high in international comparison with regard to the nominal tax rates.” A modern and competitive tax system strengthens companies’ capacities for investments and secures the future viability of the German economy. Furthermore, reference is made to tax incentives in the Growth Opportunities Act “to strengthen investment dynamics”. However, this is still stuck in the mediation committee.
Growth prospects poor
Economists had also recently confirmed the poor economic prospects. The forecasts will be reduced from the previous assumption of 0.7 percent plus, it said, although lower government spending should also be taken into account. An updated forecast should follow in mid-May. The German Chamber of Commerce and Industry (DIHK) warned of a major crisis and, according to a member survey across sectors and regions, expects the domestic economy to shrink by 0.5 percent in 2024. The Bundesbank had already observed a contraction of 0.3 percent for Europe’s largest economy in the last quarter of 2023, followed by a further decline at the beginning of 2024. Two negative quarters in a row are considered a technical recession.
However, the Bundesbank is also countering the impression of a permanent crisis: a recession in the sense of a significant, broad-based and long-lasting decline in economic output cannot still be identified and is currently not to be expected, the experts recently wrote. The Bundesbank also assumes that consumers’ desire to spend will pick up again in view of a stable labor market, rising wages and a decreasing inflation rate.
Habeck is also counting on an improving trend. Although the loss of purchasing power is high due to high inflation, the savings rate has risen to 11.3 percent. Together with a rising interest rate, this has significantly dampened domestic demand. An inflation rate of 2.8 percent is now expected for 2024 and two percent for the following year. The devaluation of money falls, while the increase in disposable income continues to have an effect.
How should investments be stimulated?
Chancellor Olaf Scholz (SPD) has already announced the reduction of bureaucracy as a free economic stimulus program. Now the annual report confirms: Unnecessary bureaucracy should be reduced and “disproportionate additional bureaucracy” should be avoided. According to the Bundesbank, in addition to bureaucracy, increased financing costs are also dampening investments.
Renowned economists such as Clemens Fuest from the Munich Ifo Institute or the President of the Berlin DIW, Marcel Fratzscher, unanimously recommend that the federal government work together with the opposition to stabilize public investments. In their view, more public money for infrastructure in transport, digital and also the education system contributes to building trust and better framework conditions.
In the annual economic report, the traffic light now refers to planned investments amounting to a good 70 billion euros for 2024 in the core budget. In addition, another 49 billion euros would come from the climate and transformation fund for climate protection, energy transition, mobility and digitalization. However, due to often lengthy approval procedures, it takes a long time for companies to benefit from investments in infrastructure. Habeck emphasized that the Ministry of Finance and Economics are also committed to facilitating private investments with great determination. The federal and state investment rate is at its highest level since the mid-1990s.
The Chancellor had previously referred to strong interest from abroad in the German location. In addition to major investments by chip companies such as Intel and TSMC, Microsoft has also announced an increase of 3.2 billion euros for the expansion of artificial intelligence.
Scholz explains Germany’s current weakness primarily with the sluggish global economy, from which the local export industry is suffering. According to the Bundesbank, this weak demand for “Made in Germany” will continue for the time being. The annual economic report expects exports to increase by 0.6 percent, after declining by 1.8 percent in 2023.
Labor shortage as a brake
The key data in the report indicate that there will be a slight increase in employment. The unemployment rate is expected to rise slightly to 5.9 percent, after 5.7 percent in the previous year. But the supply of workers must be increased in order to remove an obstacle to growth. To this end, the federal government is aiming for greater activation of the unemployed and improved employment incentives, especially for older people and second earners, which are often wives and mothers.
The planned reform of paternity leave is likely to only play a minor role. Otherwise, projects are mentioned that are usually already planned. Habeck emphasized above all that immigration must increase – also through faster visa procedures and through language courses and qualifications abroad. For future growth, “there was a lack of hands and heads and workers everywhere.”
Filling hundreds of thousands of vacancies alone would have a significant growth effect. All education politicians are called upon to raise the potential of the 17 percent of 20-30 year olds who do not have a professional qualification: more than 2 million.
Source: Stern
