The German economy is not emerging from the crisis. One of the reasons: consumers are holding back on purchasing. However, there is good news regarding public finances.
Reduced investments, a crisis in the construction industry and frugal consumers: After a slight contraction of the German economy in the spring, Germany is at risk of falling back into recession. In the second quarter, gross domestic product fell by 0.1 percent compared to the previous quarter, according to the Federal Statistical Office. This confirmed an initial estimate from the end of July. With the minus, Germany fared worse than many other European countries. Economists expect little improvement for the time being.
“The current figures show that the German economy is stagnating,” commented Federal Finance Minister Christian Lindner (FDP). This shows how necessary the federal government’s growth initiative is. The traffic light coalition has set itself 49 measures to stimulate the economy – but hardly any of them have been implemented so far.
Despite the economic downturn, the German state recorded rising tax revenues and a slightly lower deficit in the first half of the year, the statisticians reported. With a government deficit ratio of 1.8 percent, Germany is easily complying with the EU budget targets – regardless of the ongoing dispute over the federal budget and the debt brake.
Weakening exports, falling investments
According to statisticians, one of the reasons for the shrinking economy in the second quarter was a lack of investment in equipment – primarily in machinery, devices and vehicles. They fell by 4.1 percent compared to the previous quarter and thus even more significantly than investments in construction (minus 2.0 percent).
“After the slight increase in the previous quarter, the German economy cooled down again in the spring,” said the President of the Federal Statistical Office, Ruth Brand. In the first quarter, gross domestic product rose by 0.2 percent compared to the previous quarter. Foreign trade is also lacking impetus: 0.2 percent fewer goods and services were exported in the spring than in the first quarter. This is hitting German industry.
The state development bank KfW is only expecting slight economic growth in the third quarter. “The German economy will gradually recover in the coming quarters, but annual growth will not be clearly positive again until 2025,” said chief economist Fritzi Köhler-Geib. She pointed, among other things, to strong real wage increases, which will increase consumer purchasing power.
Consumer consumption does not increase
But consumers’ purchasing mood is not yet picking up – many are holding on to their money in the face of inflation. According to the Federal Statistical Office, private consumption shrank by 0.2 percent in the second quarter compared to the previous quarter. Consumer sentiment also cooled in August, according to the latest consumer climate study by the Nuremberg-based institutes GfK and NIM.
Consumers’ expectations regarding income and the economy have declined – but the propensity to save has increased. “Apparently the euphoria that the European Football Championship triggered in Germany was only a brief flare-up and evaporated after the end of the tournament,” said NIM consumer expert Rolf Bürkl.
There is little to separate us from a recession
With the minus in the second quarter, Germany is once again threatened with a recession. If the gross domestic product shrinks in two consecutive quarters, economists speak of a technical recession. Economic output had already declined slightly in 2023. Recently, the mood in the German economy has worsened even further: the Ifo business climate index fell for the third time in a row in August.
The Bundesbank expects the economic recovery to be delayed. It expects an economic slowdown, but not a broad and long-lasting economic decline. In June, the Bundesbank forecast growth of 0.3 percent for this year.
Good news for public finances
The state finances are doing better than the economy. The German government deficit has fallen slightly. According to preliminary calculations by the Federal Statistical Office, there were 38.1 billion more expenditures than revenues in the first half of the year. The energy price caps that expired at the end of 2023 dampened the increase in government spending. At the same time, the state’s tax revenues rose by 3.6 percent in the first half of the year compared to the same period last year.
At 24.6 billion euros, the federal government accounted for the largest share of the national deficit, but the financial gap there fell sharply by 17.9 billion euros. In contrast, the deficit of the states and municipalities rose sharply. The social insurance system recorded a financial surplus of 0.2 billion euros, significantly less than a year earlier (9.6 billion euros).
Measured against gross domestic product (GDP), the deficit ratio for the first half of the year was 1.8 percent. This is much less than the EU’s budget rules allow under the Stability and Growth Pact (Maastricht criteria). According to these rules, the public deficit may not exceed three percent of GDP. However, the current figures are only half-year figures and cannot be extrapolated to the year. Revenue and expenditure fluctuate too much over the course of the year.
Debate about debt brake
The EU rules on budget deficits and national debt are intended to ensure sound financial management. They are monitored by the EU Commission, which has initiated excessive deficit proceedings against France and Italy, among others.
Compared to these countries, Germany is currently almost a model child – which Finance Minister Lindner cites in the negotiations on the federal budget as a motivation for complying with the debt brake. His argument: If Germany were to break the European rules, it would be an invitation to other European countries to take on more debt than is sustainable.
Is Germany cutting back unnecessarily?
Unlike Lindner, the coalition partners SPD and Greens want to use all options for new loans in the 2025 budget and, for example, declare an emergency because of the war in Ukraine. The SPD and Greens are counting on a reform of the debt brake after the next federal election.
The “economic experts” also consider the German regulation to be unnecessarily strict. If it continues to be adhered to, the German debt ratio will fall much more than necessary in the coming decades – in the long term well below the Maastricht criterion of 60 percent of gross domestic product. Germany would then possibly have saved money, although the money could have been put to good use.
Source: Stern
