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The short-term prospects for the German economy aren’t really that bad. It’s more the longer-term prospects which are concerning. While growth in the last decade looked effortless, the next ten years could easily end up as a lost decade.
The last decade was a golden one for the German economy, except for the last 18 months obviously. In fact, there is a risk that the German economy is almost seamlessly moving from a golden decade into a lost decade.
Up to now, strong domestic demand has offset the manufacturing slowdown. Looking into 2020, it remains uncertain whether this balancing act can continue. In fact, in our view either the cyclical factors weighing on German industry will dissipate somewhat, with the entire economy rebounding, or the domestic part of the economy will also slow down. In our base-case scenario, global trade will rebound somewhat and low-interest rate and the weak euro should further support the export sector. Just in time to avoid a significant weakening of consumption and consequently pushing GDP growth close to 1%. Also, don’t forget that more working days should increase annual GDP growth by some 0.4 percentage points.
Despite a minor cyclical rebound in 2020, the risk is high that the German economy will suffer from a series of structural challenges in the coming years.
Just think of demographic changes, the lack of structural reforms over the last decade, the loss of international competitiveness, mainly on the back of too little investments in conventional and digital infrastructure, a possible continuation of de-globalisation and further disruption in the automotive sector. Contrary to the recessions in 2008/9 or 2012/13, the German economy is currently structurally less sound.
The risk that the German economy will experience a decade with much weaker growth than in the 2010s is high. Against this background, the debate on additional fiscal stimulus will continue. Not in the sense of a short-term recession-fighting package but rather in the sense of a long-term investment package, tackling the structural weaknesses of the economy. In this regards, it is remarkable that even the government business association, BDI, and the country’s trade union federation, DGB, are teaming up to a plea for an investment package of 450bn euro over the next ten years.
Given the increasing public and electorate support for more investments, we continue to expect more fiscal stimulus than currently planned by the government in 2020 and in the years after. Ironically, the increasingly chaotic political situation in Berlin could help.
The short-term prospects for the German economy aren’t that bad. With a bit of global tailwind and political will to engage in more investments, a rebound in 2020 is on the cards. It is rather the longer-term prospects of the economy which are worrisome. While growth in the last decade looked effortless, leading to a golden decade, without reforms and investments, the next ten years could easily end as a lost decade.
