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ECONOMY

‘It’s going to be a difficult year’: What German economists predict for 2020

Economists are saying that 2020 will not be an easy year for Germany, Europe’s largest economy. We take a look at what the downturn means for consumers and businesses.

'It's going to be a difficult year': What German economists predict for 2020
Photo: Depositphotos

The years of economic upturn in Germany appear to be over for the time being. Downturn is the word of the moment as international trade conflicts, a slowdown in world trade, and the Brexit cliffhanger all impact Germany’s economy.

READ ALSO: German blames Brexit and trade wars for failing growth prospects

These global conflicts are striking particularly hard at Germany’s export-oriented industry.

The Brexit cliffhanger looms particularly large for export-oriented industries. Photo: DPA.

According to Uwe Burkert, chief economist of the Landesbank Baden-Wüttemberg (LBBW), “It’s going to be a difficult year. Germany will not be able to escape that.” 

Still, there is cause for some optimism for employees, consumers, industry, and banks.  

Unemployment to remain low  

So far, the labour market has remained strong despite the economic downturn.

The first signs of a downturn appeared recently with the decline in unemployment losing momentum. Large corporations such as BASF, Thyssenkrupp, and Deutsche Bank have all made headlines recently for cutting thousands of jobs.

READ ALSO: Thousands of steel workers protest against German job cuts

ThyssenKrupp employees protest potential job cuts on December 3, 2019 in Duisburg. Photo: DPA.

Regardless, the head of the Federal Employment Agency, Detlef Scheele, is still optimistic: “We assume that it is not a cyclical crisis but a dent.”

According to estimates by experts, the total unemployment rate in 2020 should rise only slightly from 5 percent to 5.1 percent.

READ ALSO: German unemployment at lowest level since reunification

Many companies, especially small and medium-sized firms, are still desperately searching for skilled workers. They have learned to hold on to employees, even in difficult times, with short-time work.

Commerzbank chief economist Jörg Krämer explained: “With the abundant working time accounts [a system in which an employee is able to work longer or shorter hours and collect credits which are later compensated for by additional free time or work] and generous regulations on short-time working allowance, there are effective instruments available” to ensure stable employment.  

Consumers will continue to have strong purchasing power

Since the labor market is still somewhat stable, most consumers are not feeling the economic downturn very strongly.

There is comparatively low inflation at the moment, which provides employees with a larger share of the benefits of the recent wage and salary increases. Historically low interest rates are also to thank. 

There is no clear expected rise in consumer prices in 2020, and there is no clear sign that the interest rate slump in the eurozone will soon end.

When consumers have more money at their disposal, their purchasing power is also stronger, which in turn boosts overall consumption. According to economists, private consumption will continue to support Europe’s largest economy. 

Global conflicts threaten Germany’s export industry

While things are looking mostly stable for employees and consumers, industry in Germany is feeling a strong headwind. The Brexit cliffhanger and international trade disputes are particularly difficult for companies that export many of their products abroad.

As global trade weakens, unsettled customers are holding back on making orders. As industrial companies receive less demand for their goods, production is shut down. 

The Federation of German Industries (BDI) expects that industrial production in Germany has shrunk by a total of four percent in 2019.

Dieter Kempf, the President of the BDI, gives a presentation earlier this year. Photo: DPA.

The downturn especially impacts export-oriented key industries such as automotive and mechanical engineering, as well as the electrical and chemical industries, all of which are important to the German economy. 

DZ-Bank economist Michael Holstein confirms: “For the coming quarters, it will be crucial whether the international situation actually relaxes a bit.”

Slowing economy: ‘part of a bitter cocktail’

Low-interest-rate banks could be faced with additional problems due to the economic slowdown. 

Ulrich Netzer, president of Bavaria’s Savings Bank, recently warned that the economic slowdown will be likely to increase the number of non-performing loans at local banks.

Currently, the banks in Bavaria seem to be performing well. 

“But the slowing economy is another ingredient in a bitter cocktail. All of this narrows our leeway to generate sufficient returns,” he said.

All too familiar is the financial crisis in the years after 2008, when many borrowers were unable to repay their loans due to job loss or corporate insolvency.

Translated by Kate Brady. 

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

READ ALSO:

With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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