Reason for concern or premature obituary? Analysts divided on German economy

As the German economy navigates its second year of near-recession and fears about permanent deindustrialisation persist, bank analysts are split on whether gloomy insolvency numbers should be cause for further concern.

On Friday (12 July), data released from the German statistics office showed hefty increases in the number of companies filing for insolvency in April and May this year—corporate claims were as much as 33.5% and 25.9% higher than a year earlier, respectively.

This follows surges of double-digit percentage points in every previous month since June 2023 – with 2023 alone posting the highest annual increases in four years.

A separate report by consultancy Falkensteg, published by Handelsblatt last week, showed that insolvencies in the first half of 2024 were 41% higher than a year earlier, further corroborating worries over the state of Europe’s industrial and economic powerhouse.

“We really are in a phase of stagnation, a creeping loss of competitiveness, demographic change anyway,” Carsten Brzeski, global head of macro research at ING, told Euractiv.

“So that’s ultimately the shortage of skilled labour and a changing world hitting an export-oriented country like Germany pretty hard,” he added.

“It takes a while for this feeling to really set in, to realise that things are not going back to normal so quickly, that not everything is going back to normal,” Brzeski said.

The ING analyst also pointed out that this marked a new trend for Germany, as the country has previously always rebounded quickly from economic shocks like the 2007-08 global financial crisis or the recent COVID-19 pandemic.

“We don’t actually have any experience of this in [the German] society. What does it mean when a country stagnates for years? What does it actually mean for the population, for society, politically, in terms of wealth distribution,” Brzeski said.

“I would say that the rise in populism is also a consequence of this,” he added.

Apart from the current economic weakness, Germany has also lost ground on the indicator for global competitiveness by the International Institute for Management Development (IMD), where the country slid from the 15th position in 2021 to 24th this year. Over the same period, it also tumbled by 10 positions – from third place to 13th – in terms of economic performance.

“Of course, this means that more and more companies are also taking a closer look: Do I have to go somewhere else?” he said.

Deutsche Bank wants more nuanced assessment, warns of self-fulfilling prophecy

However, Robin Winkler, chief economist for Germany at Deutsche Bank Research, disagrees.

“We see insolvencies as a lagging indicator for the economic cycle,” Winkler told Euractiv, adding, “These figures sometimes get more attention from the media than from us economists.”

In an analysis published last week, Winkler and his colleague Eric Heymann argued that Germany was experiencing a phase of “industrial evolution” rather than deindustrialisation.

“You can’t deny that an adaptation process is taking place in the German industry,” Winkler said, pointing to recent moves by chemical industry giant BASF to relocate production abroad as an example.

“However, I believe that the important activities where the margins are high, where the technology value is high – i.e. above all in research and development – a lot still takes place in Germany,” he said.

He is, however, more optimistic than many that this will remain the case in the future, adding, “I think the whole discussion needs to be conducted a little more optimistically.”

“It’s simply not helpful to prematurely write the German industry’s obituary and paint a bleak picture”.

He warned that this could even work as a self-fulfilling prophecy, as “foreign investors are not willing to enter sectors in Germany also because of the narrative that we have created ourselves.”

“I think it would help to develop a more differentiated and nuanced view, not least in the industry itself, and create a little optimism again, which will help to attract foreign investors into the country.”

[Edited by Anna Brunetti/Alice Taylor]

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