Germany is in a tough spot.
Data released on Friday confirmed the world’s fourth-largest economy remained stuck in the mud last quarter and while an update on the Ifo indexes showed the business outlook turned up for a third consecutive month in November, the gauges remain very subdued.
“The German economy is stabilizing, albeit at a low level,” Ifo President Clemens Fuest said, editorializing around the prints.
Manufacturer skepticism abated “noticeably” this month, “especially in many energy-intensive industries,” the Ifo release said, even as new orders were lacking. In the services sector, firms’ assessment of current conditions and the outlook worsened at the margins.
The German economy, you’re reminded, is mired in a protracted period of stagnation — a “slowcession,” as one bank dubbed it this year. I’ve described the situation as “an interminable malaise” characterized by a long-running factory slump and a tepid consumption impulse.
The statistics agency on Friday reiterated that Q3 saw a slight contraction. “After the weak economic development seen in the first half of 2023, the German economy began the second half of the year with a slight drop in performance,” Ruth Brand, President of the Federal Statistical Office, said.
Although you could argue the marginally better Ifo prints are evidence of a light at the end of the tunnel, that’d be wishful thinking. “It’s better than another drop but is too insignificant to really celebrate,” ING’s Carsten Brzeski sighed. “It points to a bottoming-out of the German economy rather than an imminent rebound.”
The Ifo’s Fuest on Friday said Germany has to run deficits if the country wants to meet critical investment goals. “It’s impossible in my view to come up with all the necessary funding just through cuts and tax increases,” he told Bloomberg, in an interview.
As you might’ve heard, Germany was plunged into a budget crisis last week when The Federal Constitutional Court, in response to a challenge filed by conservatives, said the government can’t shift tens of billions in emergency funds into an off-budget financing vehicle.
Long story short, those funds were a legacy sum left over from a three-year suspension of Germany’s silly “debt brake,” the self-imposed straitjacket which limits government borrowing. The cap was lifted so the state could deal with the pandemic and the energy crisis. The government shifted €60 billion of unused funding to a climate fund, irritating opposition lawmakers who said the maneuver amounted to an unlawful circumvention the brake.
Conservatives cheered the ruling, but ultimately they succeeded in forcing Christian Lindner — a budget hawk, mind you — to suspend the debt limit again. I’m not sure if that counts as “mission accomplished,” but whatever the case, Lindner had to find a way to retroactively cover nearly €40 billion in off-budget financing.
This is all asinine. Linder’s pretensions to fiscal rectitude were just that, pretensions. Nominally, he was set to reinstate the debt brake, but in reality, he was funding (through the backdoor) a bevy of critical initiatives including an effort to retool the country’s manufacturing sector. Which is fine. Opposition lawmakers were right to call it a ruse, but wrong to insist that allegiance to an artificial debt constraint should take precedence over spending on energy subsidies, climate change, manufacturing upgrades and military deterrence, particularly when Germany’s borrowing costs are among the lowest in the world.
Of course, the suspension of the debt brake for a fourth year will be (correctly) described by many as further evidence to support the contention that we’ve now transitioned into a new macro reality wherein existential imperatives will force hard choices as demands on fiscal policy grow.
But this is Germany we’re talking about, so it’s far from clear that lawmakers will set aside their slavish adherence to “responsible” budgeting in the interest of heading off wholly avoidable bad outcomes.
“The country’s fiscal policy outlook has become much more uncertain,” Bloomberg Economics said. “A raft of infrastructure and environmental projects might not receive funding now [which] could reduce GDP growth by [half] next year, jeopardizing the gradual recovery after the downturn in 2023, and adding considerable downside risk to our 2024 forecast.”
Lower growth (and particularly a recession) in 2024 could conceivably give lawmakers in favor of more spending an excuse to argue that additional net borrowing should be allowed to counter what would by then be a two-year period of stagnation. To the extent such calls were heeded, it’d underscore the self-defeating nature of this charade.
In the meantime, the risk is austerity. If any budget hole is “filled by spending cuts and tax increases [it] would have a very negative impact on growth [and] could put Germany back into recession in the coming year,” the Ifo’s Fuest said, during the same Bloomberg interview mentioned above.
“The recent ruling of Germany’s Constitutional Court has exposed two new risk factors for the German economy: Fiscal austerity and political uncertainty,” ING’s Brzeski wrote. “Together with the well-known cyclical and structural headwinds, the ongoing pass-through of the ECB’s monetary policy tightening, still no reversal of the inventory cycle and new geopolitical uncertainties, it is hard to see Germany’s economic stagnation ending any time soon.”
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