“2024, the year in which narratives break,
illusions burst and hollow
promises will implode.“
Alexander Kissler via Twitter (here).
While at the beginning of 2023 we could at least still look (somewhat hopefully) into the “cloudy crystal ball” (here), the extent of Germany’s malaise became increasingly clear over the course of the year and at the beginning of 2024 the view into the crystal ball is pretty clear: things are not looking good for Germany, especially the German economy – unfortunately beyond 2024.
The year 2023 ended poorly
Last year, the German economy probably shrank by 0.3% (here), which is said to be related to an increased sickness rate (here, late effects of the pandemic?), while the annual average inflation rate was 5.9% (here). The unemployment rate rose from 5.3% in 2022 to 5.7% in 2023 (here), with the total number of people employed in Germany exceeding 46 million for the first time (here). However, according to Destatis, this increase in employment “took place almost exclusively in the service sectors“, while industry announced more job cuts towards the end of the year (see only here, here and here). However, the total number of people employed in the “manufacturing sector” has (still) remained constant at 8.1 million in 2023 (here). So the labour market is stable – for now. Despite the recession, the tax revenues of the treasury apparently also increased (again) in 2023 (here). Meanwhile, greenhouse gas emissions in Germany fell surprisingly significantly due to the slump in the manufacturing sector (here).
While all other developed countries and even Russia managed to generate growth, at least through – in some cases excessive – borrowing, Germany did not (see here for a comparison by the OECD from the summer of 2023). Economic growth in the US economy is likely to have easily exceeded 2.0% in 2023 (here), albeit also financed by record borrowing of USD 2.8 BILLION, which drove the total federal debt to over USD 34 BILLION (here and here). In comparison, the federal government’s new borrowing of just over EUR 83 billion in 2023 looks relatively modest (here, see also commentary here).
2024 threatens to be even more frustrating
In the summer of 2023, the RWI still believed (it can no longer be called a forecast) that the German economy would grow by 2.0% in 2024 – driven primarily by consumption (here). Current forecasts, on the other hand, paint a much gloomier picture for 2024: the IW Cologne explicitly predicts a further recession for Germany, here (-0.5%), as does the IMK (here, -0.3%) and Deutsche Bank (here, -0.2%). In contrast, the Bundesbank remains optimistic and is forecasting growth of 0.4% (here), while the so-called “Wirtschaftsweisen” even estimated growth of 0.7% last autumn (here). A range of +0.7% to -0.5% is already considerable – but is probably also related to the assessment of the various factors, which are broken down further below, and their respective weighting. If only because experience shows that economic researchers are too optimistic in their forecasts (here), I tend to assume a further slight recession of -0.3% in Germany in 2024 for the 2024 base scenario. Because….
… the German real estate crisis will continue to worsen (not only because an English court of appeal recently annulled the Adler restructuring plan, see here), but also because of long-term trends, see below). And it is to be feared that this property crisis will leave its mark on German banks’ balance sheets. If other banks follow the dubious example of Julius Baer (here and here) and have actually “parked” significant portions of their equity with Signa, the “property speculation” adventure could end up against the wall for some German banks (see here and here). There would then be no need for a repeat of the financial crisis in the USA (here) to have to pull the “lessons learnt” from 2008 out of the cellar here in Germany as well.
Although the banks’ caution in lending (here) was met with equally hesitant demand in the last quarter (here), demand for credit is expected to pick up in the first quarter of 2024. The question is whether the banks will be able to keep up with an actual increase in demand given their own problems – or whether the headlines about a “credit crunch” will once again fill the gazettes at the end of the first half of the year (see here for more in-depth information). Even if sufficient loans are granted, there is still the question of interest rates. Although the markets are eagerly awaiting an interest rate cut by the central banks, it is doubtful that they will actually pass on any more favourable conditions to customers in a timely manner. Interest rates of eight per cent and more for loans in favour of profitable companies will remain the rule rather than the exception – an interest rate that would have seemed completely out of date at the beginning of 2022.
In addition to the financing costs, the current and expected wage increases (just look at demands of a small railway union, here) are likely to have an inflationary effect, as are the cost increases planned by the traffic light coalition (here). The inflation rate is therefore likely to rise initially in the first half of the year. If a recessionary scenario actually materialises in the second half of the year, this – combined with higher unemployment – is likely to have an inflation-reducing effect. The realisation of the risks mentioned below, on the other hand, is likely to drive inflation again. The effect of these inflation-driving and inflation-reducing factors is difficult to estimate; overall, I expect inflation to exceed 4% for the year as a whole.
The increased financing costs will gnaw away at companies’ profitability – if they can still report any at all. “Zombies” (see most recently here) and companies that have fallen into crisis due to developments since 2020 are likely to simply break their necks in many cases. An increase in corporate insolvencies of 30% in 2024 does not seem entirely far-fetched (more details here). The situation in the German automotive sector, which has been in crisis for years, is unlikely to improve this year either (see in-depth here), while the retail sector has already experienced its “retailgeddon” in the last (normally high-turnover) Christmas period (here) – the numerous bankruptcies at the beginning of this year speak volumes. More hospitals (here) and slightly fewer retirement homes (here) are likely to file for insolvency in 2024. And the current farmer protests suggest that many farmers will once again be cancelling their businesses in the course of the year (which 7,800 have already done since 2020, here).
An increase in company closures, not only as a result of insolvencies, will lead to greater reluctance on the part of banks to lend. They are also likely to have a negative impact on the labour market (which is in a difficult state anyway, see below). The crisis is thus feeding on itself. Not only against this backdrop of rather short-term trends, but also due to the trends (explained in more detail below) that have been on the horizon for years and are now gradually impacting Germany’s (economic) development, it does not seem unlikely, even under normal circumstances, that there will be an even further decline in GDP at the end of 2023 with higher government debt, higher inflation, higher unemployment and more insolvencies.
Even this truly unpleasant baseline scenario is exposed to further increased risks compared to previous years (“risk management overload” (here), “polycrisis”, here) – depending on the outcome of the super election year in Germany (here), political uncertainty is likely to increase further (and result in consumer restraint). The attacks by the Houthis, for example, are already affecting trade, currently (fortunately) only through higher prices (here). The effects of a total blockade on the German economy are likely to be much more painful – a scenario that is far from impossible. And this is just one of the scenarios that very few people had on their radar six months ago. Who knows what risks we are overlooking. Xi Jinping’s recent statements on the “integration” of Taiwan into China (here) give just as little hope for a peaceful development in Asia as the increasing aggression of North Korea towards South Korea (here). A not unlikely re-election of Trump as US President (here) should conclude the naturally very incomplete list of these potential risks (for further risks, see also here and here or my “prophecies”, here). If one or more of these risks materialise, the drop in German GDP is likely to be even (far) higher than the -0.3% currently estimated.
In contrast, the potential “upsides” are dealt with fairly quickly. Perhaps the traffic light coalition will manage to ignite a flash in the pan with the help of new debt (Mr Habeck’s current proposal: a “special fund for companies”, here) and thus generate growth for 2024 – but this will then increase the long-term problems, see below. However, in view of the Federal Constitutional Court’s hard stop on debt beyond the debt brake and the tough stance currently being taken by the opposition, such a scenario seems only partially likely. Perhaps AI, digitalisation & electrification of mobility will (finally) have a positive economic effect in Germany in 2024: after all, the Northvolt battery factory is coming to northern Germany (here) and the Intel chip factory to Magdeburg (here). Alas, I don’t believe in this, just as I don’t believe in an end to the armed conflicts in Ukraine or the Red Sea. But even that is not out of the question.
Even beyond 2024, the risks outweigh the opportunities
As always, it is worth taking a look at Germany from the outside to realise the extent of the malaise: Just seven years after the grandiose “Newsweek” title “Doing it the German way” (here), which predicted Germany’s long-lasting dominance in 2014, disillusionment set in as early as autumn 2021 when the “Economist” mercilessly headlined: “The mess Merkel leaves behind” (here). And two years later, in autumn 2023, all the dams broke: the magazine opened with the cover “Is Germany Once again the sick man of Europe?” (here), which was of course an allusion to the legendary title from 1999 (here), which at the time was only formulated as a statement and not a question. No less a personage than Economics Minister Robert Habeck felt compelled to respond (here). However, his (naturally positive) view is opposed by a phalanx of sceptical voices: If you believe various articles, whether from the FT (here), the WSJ (here) Politico (here), Cicero (here), the NZZ (here and most recently here) or the FAZ (here), then at the very least “the worm is in it“, if Germany has not already “passed its zenith“; the country is now in danger of “crashing” (should it not already be “broken“) if it does not receive an “update“. Superlatives of negativity.
What are the fundamental problems?
But perhaps not entirely wrongly, as the situation is not unproblematic even in the short term. However, the articles cited above show why Germany is facing a second year of recession and why even after the end of the recession the growth potential is likely to be only 0.4% (here) or less (here). This means that even under favourable conditions, the German economy can normally only grow by 0.3% per annum. This in itself is a “fundamental problem”, but is itself based on even more profound causes:
In view of the current de-globalisation (euphemistically also called “de-coupling” (Deutsche Bank, here) or “de-risking” (good commentary here)), it is becoming apparent that Germany has made a bad long-term choice with its main energy supplier Russia and its most important trading partner China (here, reference should again be made to Ms Stelzenmüller’s bon mot that “Germany has outsourced its security to the USA, its energy needs to Russia and its export-driven economic growth to China.” (here, I will leave out security policy for reasons of space). The risks associated with these political decisions are now having a full impact on the German economy. And a return to this former rosy foundation of the “economic Biedermeier” seems rather unlikely, if only because numerous misguided policies of recent years and decades are now gradually having an impact on Germany and the German economy.
Since the end of the coronavirus pandemic, the consequences of demographic change have had a concrete impact on economic development – and this process is still in its infancy: The population in Germany was 84.4 million at the end of 2022 (here). According to Destatis (here), 45.7 million people were “gainfully employed” in Germany in 2022, 34.9 million of whom were subject to social security contributions. 5.2 million people were employed in the public sector at the end of 2022 (here). The number of self-employed people in July 2022 was just over 3.5 million (here; but see also here), of which 1.9 million were solo self-employed. The number of self-employed people rose between 1997 and 2012 (to 4.3 million) and has been falling since then, with a real slump in coronavirus times. And from the approximately 35 million employees subject to social security contributions, you can subtract the 5 million employees in the public sector – then you end up with around 30 million “actual potential value-adding” employees subject to social security contributions. However, these employees are expected to finance the 5 million public sector employees, children and young people as well as 21 million (!) pensioners with their latest pension increase (here, see also here). The bottom line is that “the old” are now voting on the future of “the young” (here), but the young are supposed to finance the (pensions of the) old because there are no young people for the companies (here). The potential for intergenerational conflict is already clear from the bare figures.
The idea of closing the gap in the labour force through immigration is an obvious one, not least because this gap was probably closed during the German “economic miracle” (“Wirtschaftswunder“), see also here, but it is not currently bearing fruit: for one thing, skilled foreign workers are not being drawn to Germany (here). Secondly, although the number of people in employment in Germany rose to a record level last year (here), as GDP fell, productivity per person in employment fell – in other words, the mere increase in employment will not fill the employment and pension gap. Although there still seems to be a well-filled “hidden reserve” of skilled labour (here), 61% of the officially registered unemployed are only looking for “helper jobs” because they have not undergone any training (here). And the Federal Employment Agency is obviously not succeeding in bringing the hidden reserve and the other unemployed into the labour market – if 113,000 employees only manage to place 103,000 unemployed people in new jobs (here). If, in view of the “success” of the Bürgergeld, the so-called “distance requirement” between social benefits and income from gainful employment no longer seems to be upheld (see only here), so that the Minister of Labour is once again calling for sanctions, which were largely thrown overboard with the abolition of Hartz IV (here), it is clear that the problems on the labour market are partly structural – and cannot be solved overnight. Not a good sign in view of the fact that unemployment is now rising (here) – possibly already under the influence of the increasing use of AI in companies (here).
Housing construction has slumped dramatically (here) – which will inevitably lead to a housing shortage in popular locations as immigration rises sharply (here). As a result, property prices are not falling as much as they otherwise would – which is good for bank balance sheets. But rents are rising in urban centres – and there is no end in sight (here). In addition to the socially explosive nature of a housing shortage, the loss of purchasing power naturally also has a negative impact on economic development.
But it is not only investment in housing that is affected – Germany as a whole appears to be an “investment ruin”, at least to some commentators (Gabor Steingart very pointedly here, but see also here). The examples of the Bundeswehr (here), Deutsche Bahn or the road network (see more details here, here and here with reference to the report of the Pällmann Commission, which already showed an investment gap of DM 7.5 billion per year in investments in the road network in 2000, here, p. 58) are presented to us daily in the media. But Germany is also lagging behind in digitalisation (here, unfortunately also in the economy here).
While investment in “hard” infrastructure is suffering, bureaucracy is flourishing in Germany (here) and Europe (here) – leading not only to some (sometimes bitter) “style blooms” (see only here and here), but also to a quite remarkable increase in the number of civil servants (see most recently only at federal level, here). Nevertheless (or perhaps because of this?), the German judiciary, for example, appears to be consistently overloaded, at least in civil law, despite the declining number of cases (here) – which could perhaps also be due to the lack of digitalisation. Bureaucracy and delays in enforcing one’s own rights naturally also have a negative impact on economic performance.
Entire books are now devoted to the misguided developments in German energy policy, so let me just say that the German population pays almost the highest energy prices in Europe (here), while energy generation after the shutdown of all nuclear power plants in Germany emits so much CO2 (see here or here) that it may well equalise the reductions that were supposed to occur as a result of the GEG (at least here). Although there has not yet been a blackout, the possibility now granted by the legislator to restrict electricity purchases (here) is being “gratefully” accepted by the energy suppliers, as the first “warnings” already show (here). The industrial electricity price is dead – long live the “electricity price package” (here), while the “Klimageld” is probably not dead – it will only be paid out (in the election year) 2025 (here). To summarise, there is uncertainty not only about the security of the electricity supply itself, but also about price security. And whether the current German energy mix contributes to climate protection is also not entirely certain (summarised here). The high energy prices, as well as the uncertainty about the stability of the energy supply, have already forced some production companies in heavy industry (e.g. Speira (here) and HAL (here)) to go out of business. They will not be the last.
These various uncertainties are now having a full impact on the propagated “green economic miracle” (already propagated in 2006, cf. here ). Whilst the (green) Minister for Economic Affairs is bravely presenting his industrial strategy (here, comments here, here and here), this very German industry is creating facts, relocating production abroad (here, here and here) and cutting staff in Germany (see only here). While a German “top economist” still classified capital flight and de-industrialisation as a “myth” in September 2023 (here), Germany has already lost a considerable amount of corporate capital in previous years (here) and German industry continues to signal a spirit of optimism – albeit towards new shores (here). It does not seem impossible that this “degrowth” of Germany is not entirely inconvenient for some Greens (see here or here).
Back in March 2023 – well before the Federal Constitutional Court’s judgement on the unlawful federal budget (here) – the Federal Audit Office warned the federal government of a “loss of control” in the federal budget after the national debt was drastically increased in coronavirus times (here). This debt burden – since the turnaround in interest rates – also costs a lot of money again and therefore further “petrifies” a federal budget, 90% of which is already determined by interest expenditure, personnel expenses and legally binding services (here). But the debt burden of other public budgets has also increased significantly: the debt burden of German municipalities has more than quadrupled in one year (here), only the federal states generated a small plus in 2023 (here). When SPD politicians now declare that “we have no more money” (here), this is probably also true because these “debt levels” do not even include the so-called “implicit public debt” (see here). The higher financing costs for the “nanny state” naturally also affect its ability to distribute “gifts”.
These factors – some of which are not even present in the media – are already present and will become increasingly virulent over time and without countermeasures – but they are coming up against a political scene that has lost the trust of citizens (see only here, here and here on the gradual decline in sentiment over the year 2023). Chancellor Scholz is not only considered unpopular, but even “colourless” (The Economist, here, at WiWo here). However, the dissatisfaction in the political sector itself is so great that several new parties could be founded in the near future (BSW, here, “WerteUnion”, here, but a new liberal party is also conceivable, here). Does this mean that Germany is facing “Weimar conditions” (here) in these difficult times – even without taking a look at the current discussion surrounding the AfD (see here)? The year and the results of the state elections in particular will show.
The German economic elite has long hidden behind politics, or rather, has been more inclined to “cuddle up” with it than to point out misdevelopments. This is supposed to change now (here), German entrepreneurs are becoming vocal (here). However, German top managers have also contributed to the decline through their own misjudgments (here). As a result of all these misdevelopments, the German middle class is shrinking (here, here und here) , the symbol of the previous German economic power. Wealth distribution is becoming more extreme, and overall, Germans are noticeably poorer than other Europeans (here).
The sum of these cause-and-effect chains leads to a continuous decline of Germany in international rankings (here), as Germany’s innovation capability has unfortunately eroded over time (here).
How can the way out of the crisis look like?
One could go on endlessly collecting and analyzing numbers, data, and facts about the current crisis status of Germany. However, the aforementioned examples illustrate that the way out of the crisis will not be quick but long and arduous. It is clear, though, that this is a crisis made by humans, and since Kahneman’s “Thinking, Fast and Slow” (here), we should know that we humans are not only driven by instincts but often victims of our own “cognitive biases.” Not only have I referred to the German cognitive bias of the 2010s as “economic Biedermeier” (in-depth Beissenhirtz, ZInsO 2020, 441, 462, here), but Daniel Stelter spoke of the “illusion of prosperity” and the “fairy tale of the rich country” (here) and Olaf Gersemann already in 2013 of the “Germany bubble” (here) Now, Mr. Habeck may have unintentionally burst this illusion, as he proclaimed, “We are surrounded by reality.” (here). But here too, “Insight is the first step to improvement.” In other words, without realizing that the previous path followed an illusion, recovery cannot begin. However, this insight is only slowly emerging, as the following examples show: Thomas Mayer correctly explains that this crisis is based on a (long-term) “erosion of ability” and a “decline in diligence” (here). We Germans (and those living in Germany) have indeed been performing poorly in the PISA comparison for years (here) and work comparatively little compared globally (here). It does little good then to demand the suspension of the series, as the Philologist Association is currently doing (here). Similarly, trying to enforce a four-day workweek in Germany (here) would likely not help if the resulting shortage of skilled workers cannot be compensated for by increased digitization. However, these resistances show that the necessary insight into the possibly required hardships for overcoming the crisis is not yet anchored in the understanding of the majority of Germans (as one of the German economic “wise women” aptly put it, here). It remains to be hoped that as a positive sign at the end of possibly another economically weak 2024, the realization of the surrounding realities will indeed prevail. The rest will follow, because “where there’s a will, there’s a way.”
Note: most of the links lead to sources in German
Translated with assistane of DeepL.com