Europe's Biggest Economy Is Stuck in Limbo
(Bloomberg Opinion) -- Germany’s zero growth rate in the last three months of 2018 reflects the economy’s strange state of limbo: It’s healthy, productive and has little space for expansion – but is also vulnerable to one-off shocks, and there may be plenty of those this year, especially in trade.
The country almost sank into a technical recession in the second half largely because of two temporary weaknesses. Car sales dived because of tougher emissions regulations, for which the auto industry, responsible for 20 percent of Germany’s industrial revenue, had been ill-prepared. And a record drought lowered the level of the Rhine and other important waterways, making it harder and more expensive to transport industrial and construction materials.
Neither of those two disruptions is likely to last into this year. New car registrations dropped 1.4 percent year-on-year in January, but this is nothing compared with the dramatic declines seen in the second half of last year – September alone saw a 30 percent decline. Besides, new registrations were up 12 percent on December.
The auto industry is finally getting its act together, and help is likely to come from the government. It is trying to avert an epidemic of diesel bans in cities across the country by setting (relatively benign) emissions limits for diesel vehicles; more clarity about these restrictions should help to allay consumers’ wariness about buying new vehicles.
As for the drought, which was already evident in February last year, it appears to be receding. Water levels in the Rhine are rising, and barge rates are on their way down, according to a recent note from Riverlake Barging.
Excluding these constraints, Germany is poised for modest growth: 0.4 percent in the first quarter and 1.3 percent for 2019, according to the median forecast of economists surveyed by Bloomberg. The German government and the Association of Chambers of Commerce and Industry (DIHK), though, have lower expectations of 1 percent and 0.9 percent for the year respectively.
That would hardly be a disaster for a country whose population only increased 0.2 percent in 2018. German industry’s capacity utilization rate is above 86 percent, and the country is enjoying record employment, with 45.2 million people in work, 1.1 percent more than a year before. And it’s not that workers are less productive. On the contrary, labor productivity increased by 0.2 percent in 2018.
But the danger that even these modest forecasts could be off in 2019 is higher than it was last year. The economy is export-dependent (December’s unexpectedly strong exports were a major recession-preventing factor) and the trade climate is worsening.
According to DIHK’s latest survey of 27,000 companies, exporters’ expectations for this year are at the lowest since 2012, influenced by the trade wars started by U.S. President Donald Trump and by Brexit.
Last month, Galina Kolev of the German Economic Institute in Cologne modeled different outcomes for the trade wars. If the U.S. and China reach no trade deal, but raise no additional barriers, she estimates Germany would lose 0.1 percent of gross domestic product over five years compared with her base scenario. If the U.S. hit China with 25 percent tariffs on all goods imports, that loss would go up to 0.2 percent of GDP. But in the absolute worst case – if Europe, too, is hit with punitive U.S. tariffs – Germany’s economy would be 3.8 percent smaller in five years’ time than under the base scenario; that would pretty much wipe out any growth.
As for Brexit, Germany has been reducing its dependence on the U.K. market. In 2018, exports to the U.K. dropped for the third consecutive year and are now 7 percent below their level in 2015. The car industry’s exports to the U.K. are down 20 percent on the same basis, while those of the pharmaceutical industry have shrunk by 40 percent, according to Deutsche Bank. Even so, the U.K. still accounts for 6 percent of Germany’s total exports, and a shock like a no-deal Brexit would still be painful.
Germany is at a point where trade-related bad news could turn growth negative and plunge its business community into pessimism. Then the expansion in the labor market and investment would be threatened. To avoid this, the government would need to respond with more spending (already evident at the end of last year), tax cuts, or a bit of both. Longer-term, it makes no sense to delay infrastructure investments – otherwise Germany risks being stuck in limbo between weak growth and the threat of one-off destabilizing events.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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