The current economic situation in Germany

Professor Holtemöller, looking at the negative developments in gross domestic product, economic activity and unemployment figures, how bad is the situation?

Oliver Holtemöller: I think that the small minus in economic growth should not be a cause for additional concern. These data may still change. More important than a decimal number is this fact: we have had weak economic development in Germany as a whole for some time. And it seems we have yet to find the right instrument to counteract this. Not only do we have high insolvency figures, rising unemployment and inflation that has yet to be tamed, but also we are facing an overall oessimistic outlook. So you have to be an optimist to believe in a rapid change in the situation here.

How does Germany compare to other countries?

It is true that other eurozone countries are doing better overall. The eurozone economy grew by 0.3% in the second quarter of 2024, and this already includes the decline in Germany. The economies of the large eurozone countries France, Italy and Spain grew strongly. Although China's growth figures are below previous levels, they are still high by global standards. We are also not seeing any economic weakness in the US. Unfortunately, the German economy is currently unable to benefit from the external economic environment.

From your perspective, what are the reasons why the German economy is stagnating instead of experiencing positive growth like the U.S. economy?

There is a great deal of uncertainty in Germany, among both private households and companies. This is partly due to the economic policy of the coalition government, but not only that. The perception is that the current economic policy is not clear and transparent. In many policy areas, it is difficult to know what to expect. This applies in particular to issues in the energy sector, which is important for industry as well as for the construction sector, for example. As a result, households and companies are reluctant to make major expenditures.

What is the regional outlook?

The weakness of the German economy is currently not short-term, not limited to sectors and not limited to individual regions. Let's take a look at Saxony-Anhalt, where we at the Halle Institute for Economic Research, together with Creditreform, recently took a closer look at the mood in companies: The economic indicator for small and medium-sized enterprises is currently at its lowest level in ten years. Almost half of the companies expect a drop in sales, and the construction industry in particular is reporting very poor business prospects. This is all not very encouraging.

If the German economy is in a state of overall weakness, what needs to be done now?

First of all, it is important that we recognize that action is needed. The need for action means that simply waiting is not an option. Above all, we need to focus on potential growth, i.e. the medium-term development of labor input, investment and productivity. However, short-term political quick fixes, possibly motivated by the prospect of upcoming elections, are not advisable. The right approach would be a rational economic policy that is geared towards potential growth and can be planned by households and companies – while taking into account the legally binding emission reduction targets.

And what does that mean specifically?

If we look at our economic growth in more abstract terms, beyond the short-term economic situation, then we see that this potential growth is suffering primarily from demographic change: we have more and more people leaving the labor force and fewer and fewer entering it. This is eating away at our growth opportunities. So far, there have only been proposals in this area and few results. And even these proposals often appear poorly thought out. Take the latest proposal for a tax bonus for skilled foreign immigrants, for example, which may make sense in principle but is rejected by almost all parties involved in the current situation. The right approach would be to work towards a general relief for all employees and companies.

And that's enough?

Demographics and the tax burden are just two issues. The energy transition and digitalization are two other major areas of work. Here, the main thing is to get the framework conditions right so that households and companies can draw up reliable plans and more private investment takes place.

In view of the upcoming elections, however, German politicians might still want to do a little more for the economy in the short term...

That would hardly be promising. After all, the government has only a few tools at its disposal to influence the economy in the very short term. Such fine-tuning of the economy is not recommended. To achieve sustainable growth, economic policy should be geared to the medium to long term.

In fact, the federal government has recently passed various stimulus packages to revive the economy, most recently the growth package. Is this going in the right direction?

It is good that the government has given thought to the growth package. But it is still unclear which of the measures it contains will be implemented, when and how. And again: a general relief for all employees and companies is a much more promising approach than a broad bundle of measures that are fragmented and difficult to oversee.

A second recent initiative was the Pension Package II, which the government believes will make pensions future-proof.

... but it probably won't. Pension Package II is more likely to exacerbate demographic problems, because social security contributions will inevitably have to rise, whereas the opposite would be economically advisable: a relief in this area.

For Germany, it is stated that the economy is still suffering from the consequences of the Covid pandemic. The pandemic has been over since March 2022 – is it really still having an effect?

Yes, absolutely. We see this, for example, in the number of insolvencies. Some companies that have recently experienced payment difficulties have roots that go back to the pandemic or even before. Massive government support has averted insolvencies for the time being – but in the medium term, struggling companies do become insolvent, and we are now seeing that.

And what do you expect for the near future?

I think that the economy will slowly recover somewhat over the next few months. Private households have recently seen real income growth again, and sooner or later this will also be reflected in consumer spending. In the fall, however, the forecasts of many organizations will probably be more cautious than the summer forecasts. This is already apparent in the figures from the first half of the year. However, the US elections and the geopolitical tensions in the Middle East will continue to cause uncertainty.
 

The questions were asked by Wolfgang Sender.