Weak demand adds to Germany’s woes

Nearly every sector of the German economy has been hit by sluggish demand, underscoring the country’s weak economic environment as it grapples with an intensifying political crisis.
Researchers at the Munich-based Institute for Economic Research warned on Monday that downbeat spending by businesses and consumers continued to constrain economic growth in the eurozone’s largest economy.
The institute said that 41.5 per cent of companies suffered from a scarcity of new business in October, up from 39.4 per cent in July and the highest share since 2009 when the global economy was gripped by financial crisis.
“The lack of orders is continuing to hinder economic development in Germany,” Klaus Wohlrabe, head of surveys at the institute, said. “Hardly any industry has been spared.”
Nearly half of all companies in the entertainment sector complained of too few orders, while 32.1 per cent of services providers also said that demand was insufficient.
The data is the latest piece of evidence illustrating that Germany has become the weakest economy in the G7 group of rich countries. According to the International Monetary Fund, German GDP will stagnate this year, compared with 1.1 per cent growth for the UK and 2.8 per cent growth for the United States.
Once Europe’s growth engine, the German economy has been hit hard by the sharp increase in European energy prices following Russia’s invasion of Ukraine in 2022. Manufacturers had for years relied on imports of cheap Russian gas to make business profitable.
Rapidly expanding production of cheap petrol and electric cars in China has helped the world’s second largest economy to expand its share of the global automobile market. A glut of Chinese vehicles entering the global market has put intense pressure on Germany’s car makers, alarming policymakers. Volkswagen announced in October that it will shut at least three plants in Germany, the first closures in the company’s 87-year history.
Donald Trump, the president-elect of the United States, has suggested he will impose a tariff of up to 20 per cent tariff on all imports, a levy that could heavily curtail German trade with the world’s biggest economy.
Analysts at Jefferies said: “There is no easy way out [for] Germany from the current low-growth regime, apart from doing some version of fiscal expansion.”
Olaf Scholz, the Social Democratic Party German chancellor, ended a three-way coalition power-sharing agreement with the Greens and Free Democratic Party (FDP) last week when he sacked Christian Lindner, the finance minister, putting the country on track for a snap general election.
Scholz scheduled a confidence vote in his chancellorship for January 15, which is likely to lead to a March general election. However, opposition parties called on the chancellor, 66, to bring forward the confidence vote to next week to prevent the German parliament from entering paralysis.
Scholz has said that he would be open to an earlier confidence vote — which could result in a January general election — provided a deal is reached with opposition parties on which laws can pass through the Bundestag this year.
Scholz is also struggling to get his supplementary budget ratified, with the Christian Democratic Union party and FDP opposing the tax and spending measures.
Analysts at Citibank said: “Failure to agree could lead to a spending freeze for the rest of the year.”
The surge in inflation over the past two years has eroded German consumers’ spending power, keeping demand downbeat in the economy. Inflation peaked at 10.4 per cent in October 2022 but has since fallen to 1.8 per cent, below the common 2 per cent target for the first time since 2021.Officials at the European Central Bank responded to the inflation crisis by sending interest rates up 4 per cent, a record high. It has started to loosen monetary policy, bringing the main deposit rate down to 3.25 per cent.
Figures published last month showed that the German economy expanded by 0.2 per cent in the three months to September, higher than expected and meaning that the country avoided a technical recession.