If you’re wondering whether the fiscal fiasco in Germany impacted the business outlook for the world’s fourth-largest economy, the answer is “yes.”
Recall that the German government was plunged into a budget crisis last month when The Federal Constitutional Court, in response to a challenge filed by conservatives, invalidated an effort to shift tens of billions in emergency funds to an off-budget financing vehicle.
The debacle — a self-inflicted wound towards the end of a very difficult year — was resolved a few days ago, but as Olaf Scholz put it while unveiling a spending plan that included cuts to climate initiatives, “it’s clear we have to make do with significantly less money.”
German businesses could’ve done without the drama. It’s been a tough couple of years. The economy loitered on the brink of recession in Q3. The last truly solid quarter was Q1 of 2022.
Ifo (the survey that matters in Germany) stabilized in November, but data released on Monday suggested the budget boondoggle undercut sentiment anew. At 86.4, the business climate gauge fell for the first time since July. The expectations measure surrendered two months of gains.
“Sentiment in German business has clouded over,” the color accompanying the release read. “Companies were more skeptical about the first half of 2024. As the year draws to a close, the German economy remains weak,” Ifo said.
Although the mood in the services sector actually improved, the manufacturing outlook darkened “noticeably,” as the survey put it. “Companies assessed their current business situation as significantly worse,” the release lamented. “Energy-intensive industries are having a particularly tough time.”
I realize this doesn’t make for the most compelling reading, but it’s important. Germany is a focal point for global macro watchers, and the country is stuck in what I habitually (and aptly) describe as an interminable malaise.
German industry was waylaid by the war in Ukraine (which exposed the perils of energy dependence) and there are serious concerns about trade dependency with China.
As I put it a few months back, when the central bank warned on trade concentration with Beijing, the situation illustrated by the figure above isn’t tenable in the current geopolitical environment. It suggests China, like Russia, could tank the German economy in the event of an armed conflict with the West.
The budget bickering served as a reminder that the domestic political environment remains fraught. On Sunday, independent Tim Lochner won a mayoral race in eastern Germany. He’s backed by the far-right AfD.
As The New York Times explained, “municipal election rules in Saxony [allow] more than just two candidates [to] advance to [a] runoff, and the votes in opposition to the AfD were split.” An expert who spoke to the Times said, “It’s a minor dam break that neither of the other parties pulled out to ensure AfD would not win.”
Concern around the ongoing appeal of far-right politics in Europe reached a fever pitch late last month when Geert Wilders, a mainstay of the firebrand ethnonationalist scene, swept to a landslide victory in Dutch national elections. Growing support for AfD in Germany is another canary.
Editorializing around the Ifo release on Monday, ING’s Carsten Brzeski said it’s been “another turbulent year [for Germany] in which the economy seems to have been in permanent crisis mode.” “All in all, we expect the current state of stagnation and shallow recession to continue,” Brzeski sighed. “In fact, the risk that 2024 will be another year of recession has clearly increased.”
Oh well, at least the DAX is at a record.
TBH, they’ve been asking for it for a long time.
I take no pleasure in the biggest economy in Europe getting mired in problems since this will inevitably affect us all. But their stubbornness, trust in their Mittlestand and conviction that “made in Germany” was a get out jail free card for any industrial mistake are really self inflicted wounds, driven by excessive pride…
To avoid the fall, they’re going to have to be smart and the rest of Europe better pull with them.
As I was looking at the last chart showing German-Chinese trading patterns it occurred to me that there is an interesting trend in here. Because of the war and Russia’s denial of energy exports to Germany and Europe, Germany’s economy has been harmed. However, as Germans have stepped up imports of Chinese goods and the ability of China to obtain Russian energy, China is effectively passing Russian energy along to some of its trading partners, as that energy is embedded into Chinese goods. Interesting way for Russia to get around the energy embargo and China to boost trade.
Seeing far-right parties win one election after another in Europe, I’m reminded of the Tom Wolfe quip: “The dark night of fascism is always descending in the United States and yet lands only in Europe.” Let’s hope the other half of that coin at least holds true, i.e. that we manage to avoid a second Trump presidency.