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Germany still in the lurch: how it can weigh down European growth until 2030

Date: November 29, 2023 Time: 01:50:10

The current context is dominated by credit events and the risk that the banking system could have more blows. The European Union (EU) has come to look at the conflict in Ukraine to observe the effects that the rise in interest rates can have on economic activity. But not only that. The doubt that Germany can generate stable growth in the long term reappears in the absence of reforms from the government of Olaf Scholz. Is there a real risk?

A report by Julian Zimmermann, a sovereign debt analyst at Scope Ratings, explains that Germany’s long-term economic growth risks falling further behind other highly rated countries if the government does not follow through on its success in protecting businesses and households from the energy crisis with growth-boosting structural reforms.

“The sluggish long-term growth outlook contrasts with the likelihood that Europe’s largest economy will experience a worst-case mild recession in 2023, a better outcome than most expected a few months ago,” it says. Zimmermann. “Credit goes to a series of federal government measures, the rapid adaptation of German industry and consumers to high energy prices and declining Russian gas imports, as well as mild winter weather” , he adds in his report.

At the same time, Germany’s economic output at the end of last year had only recovered to its pre-pandemic level of three years ago, which is in stark contrast to the situation in the eurozone and its surrounding economies. “In fact, by the end of 2024, we expect the German economy to only grow around 1.2% more than at the end of 2019, compared to 5.7% in the euro area and 7.7% on average for other countries. countries with AAA rating”, the expert from the credit rating agency deepens his analysis.

In his view, Germany’s last for growth in Europe will continue until at least 2030, which will put the country’s strong public finances to the test, given the cumulative costs related to the pandemic, the war and the energy transition.

The necessary changes

The text focuses on the fact that addressing the structural change that Germany needs to boost growth is a political challenge. “The first steps have already been taken”, Zimmermann deepens. This would include a proposal to review immigration laws, including granting dual nationality to non-EU citizens, and easing rules for the immigration of highly-skilled workers in recognition of the pacimiento and decrease in the number of people of working age, which is estimated to decrease by around 0.8% per year between 2023 and 3030.

I would also highlight the investment deficit, equivalent to some 410,000 million euros as of 2021, the reduction of which will be equally difficult and costly in the coming years, given the more restrictive financing conditions. Germany has experienced a persistent lack of investment coupled with slow project implementation, although investment needs are high to support the country’s energy-intensive manufacturing sector in its green and digital transition.

“These challenges are the backdrop to Germany’s current weak economic results. Despite the relatively moderate quarterly slowdown in Q4 2022 and the more benign energy supply situation, we maintain our forecast of an economic contraction of 0.2% in 2023”, comments the Scope Ratings expert.

These are data that would contrast with the recent revisions of the IMF (0.1%, from -0.3%) and the German government (0.2%, from -0.4%), and mainly reflect their forecast of more restrictive financing conditions that curb investment and private consumption. “These effects will only be partially balanced by the improvement in the terms of trade and the increase in foreign demand from China, as it eases pandemic restrictions,” Zimmermann describes.

the energy market

Germany’s short-term economic performance is also stabilizing thanks to significant tax breaks, which will be phased out in 2024, according to the Scope Ratings report. The German federal government has promulgated various relief measures packages.

The most expensive is for a reduction in gas and electricity prices for households and businesses, with a budget of 83.3 billion euros (2.1% of forecast GDP) in 2023. “However, assuming Given that the current lower-than-expected prices for gas and electricity will continue through 2023, the measures could end up costing only around half of the budgeted amount,” Zimmermann qualifies.

In the longer term, as tax aid has been withdrawn due to a political commitment to meet the borrowing constraints imposed by the debt brake, the credit rating agency estimates that the German country’s growth potential will be around 1% per year for the next few years, the lowest in its benchmark group, and 0.1% below what we expected a year ago.

Towards the end of the decade, several economic research institutes estimate that the rate will continue to decline to around 0.5-0.75%, as the aging trend accelerates. “This contrasts with the relatively solid growth of 1.7% observed in the pre-pandemic period of 2015-2019”, concludes Zimmermann.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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