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Here's why German bosses are worried for the future

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Here's why German bosses are worried for the future
Could this Frankfurt container terminal be about to get a lot less busy?
12:08 CET+01:00
Look at the government tax report for 2015 and you could be excused for thinking Germany can be confident about the immediate future.

The country's economy grew by 1.7 percent and the government doubled its budget surplus thanks to the boost in tax income.

And businesses clearly haven't been shy about committing to new workers, with unemployment at its lowest-ever level since reunification and half the EU average in 2015.

But this month's business climate index released by the Ifo economic institute predicts darker times ahead.

The index dropped almost two points in February, with "the majority of companies pessimistic about their business outlook for the first time in over six months".

"Manufacturers' business expectations declined steeply, marking their largest downswing since November 2008," Ifo said.

And that's a worry – because the index often predicts how things are going to go in the real economy.

Here are five reasons why the business leaders may have it right:

1. Germany can't escape the problems in the Eurozone

"Until the end of last year, exports were going well, but now we're noticing that Germany isn't decoupling itself from the problems in the Eurozone," Ifo expert Dr Klaus Wohlrabe told The Local.

Much of the growth in 2015 was based on German consumers' confidence rising, driving them into the shops to buy German-made products.

But since long before last year, Germany's economic success had been based on high demand for its products in neighbouring Eurozone countries.

But there are signs that's beginning to evaporate. Official data has shown production declining in December 2015 as eurozone demand for German-made goods fell.

"Consumption and construction are doing well, consumption is robust. Industry is where the problem is," Dr. Wohlrabe pointed out.

Production fell in December, and "manufacturers fear that the downturn will continue," the Ifo report said.

"People saw that things went well for them last year and assumed that would continue, but now that doesn't look likely," Dr Wohlrabe said.

2. Low oil prices

At first glance, low oil prices ought to be good for the German economy.

They feed into lower transport and energy costs for businesses and consumers.

That means that in the short term, ordinary people will feel a little better off and happier to go out and spend on lower-priced goods.

But in the long term, they can have negative effects, especially as oil-exporting countries are important trading partners for German manufacturers.

Work at the Daimler factory in Rastatt, Baden-Württemberg. Photo: DPA

Russia bought €30 billion of German goods in 2014 – the last year for which statistics are available – making it Germany's 13th-biggest foreign market.

And countries in oil producers' organization Opec bought a total of €36 billion of German goods in 2014 – meaning that if they were a single country, they would be Germany's 11th-biggest export market.

That also doesn't take into account foreign investment in Germany from oil-producing countries.

3. Fears for China

Over recent months, financial markets in China have been in turmoil – and that's sent tremors all the way around the world to Germany.

"There's little momentum in China and in the world economy," Ifo expert Dr Wohlrabe said. "China is an important destination for German industry. If exports aren't working, Germany isn't doing well."

China is the Federal Republic's third-biggest export market after the Eurozone and the USA, clocking up a tab of €74.3 billion with German manufacturers in 2014.

Chancellor Angela Merkel with German and Chinese flags during a visit to Heifei, China in October 2015. Photo: DPA

And that doesn't include sales by German companies' local subsidiaries in China – where large businesses such as car manufacturers often have factories to supply the burgeoning market.

With China such a linchpin of the world economy, slowing growth there will also hit other countries Germany exports to – leaving them with less cash to spend on German goods in turn.

4. European crises

Thought you'd heard the last of the Greece crisis with the third round of bailouts last summer? Think again.

The troubled Mediterranean land is back in recession and Prime Minister Alexis Tsipras is facing resistance from unions as he tries to implement the reforms Germany and other creditors insisted on in return for their cash.

And it's just the straggler in a Eurozone that continues to post lacklustre growth figures almost across the board.

Meanwhile, the continent continues to wrangle with the refugee crisis. Some countries have begun introducing piecemeal border controls without consulting other EU members.

If the Schengen agreement – which removed border checks between 26 countries, mostly in the EU – were to collapse over the refugee crisis, a German think-tank has calculated the costs for Europe at up to €1.4 trillion.

"The biggest point that's causing uncertainty is the lack of a master plan for dealing with the refugee crisis," Dr Wohlrabe said. "No-one really knows how that's supposed to be solved."

That's in spite of Chancellor Angela Merkel's efforts to bring other European countries on board with a plan to share out refugees and work together with Turkey to reduce the number of people making the trip to Europe.

Fears that Britain might leave the EU after an in-out referendum later this year are not making confidence in the 28-nation union any rosier either, Wohlrabe noted.

5. Lack of investment

"Investment isn't really increasing," Dr Wohlrabe said. "We've been waiting for years for firms to invest, all the conditions are there - it's puzzling."

Photo: DPA

Despite the European Central Bank pumping billions of Euros into the Eurozone economy as part of its quantitative easing measure, this money hasn't translated into investment in new projects in Germany, the economist at Ifo argue.

"The European Central Bank (ECB) has exhausted all its tools. Financing is very cheap and easy in Germany, there's not much more to do there," Wohlrabe explained.

It may well be that until some of the intractable crises facing Europe and the world are lifted, no-one wants to risk borrowing money, even at record low interest rates - just in case things don't turn out for the better.

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