The latest forecast from the International Monetary Fund (IMF) shows that the German economy will shrink in 2023, making it the only economy in the Group of Seven (G7) to officially enter a recession this year. The moniker "the sick man of Europe" has quietly reappeared in various media outlets. Germany was first labeled with this nickname in 1998, at that time, the country was dealing with the economic challenges following reunification.
However, some economists believe that this nickname does not fairly or accurately describe the German economic performance. Holger Schmieding, Chief Economist at Berenberg Economics, stated last week that calling an economy with a high employment rate and a vast number of job vacancies "the sick man of Europe" is indeed inappropriate.
Despite Germany entering a recession in the first quarter of 2023, the current Germany differs significantly from the last period it was dubbed "the sick man of Europe," including pressures from external geopolitical challenges and the global economic slowdown. Stefan Kooths, Director of Business Cycle and Growth Research at the Kiel Institute for World Economy, in an interview with CNBC, stated that the problems dragging down the German economy can be divided into two distinct types: cyclical problems stemming from the global economic outlook and structural issues originating within Germany itself.
Carsten Brzeski, Global Head of Macro Research and Chief Eurozone Analyst at ING Research, remarked that the current economic condition of Germany differs significantly from that of the 1990s and early 2000s. Presently, Germany faces cyclical "headwinds" in the economy. The economic downturn post-Covid in China has hit manufacturing countries worldwide, while higher interest rates and energy prices have also significantly impacted manufacturing nations.
As one of the most important manufacturing countries in the eurozone and globally, Germany's exports are mainly focused on industries such as automobiles, machinery, tools, and chemicals, which fluctuate with the economy. Following the relaxation of pandemic restrictions globally, Germany's export sector did not experience the anticipated growth.
Data from the Federal Statistics Office show that the value of goods Germany exported to other countries in June only grew by 0.1% compared to the previous month, while China's exports in June fell by 5.9%. The export slump led to Germany experiencing a trade deficit for the first time in decades.
Compared to cyclical economic "headwinds," the key to Germany shaking off the "sick man" image lies in addressing its structural issues. Joerg Kraemer, Chief Economist at Commerzbank, said the lack of a credible comprehensive reform plan is the fundamental cause of poor economic performance in Germany. Germany needs to reduce corporate taxes, expedite approval processes, increase investment in roads, bridges, and digital infrastructure, and improve the competitiveness of electricity prices.
Kooths noted that since 1991, working hours in Germany have been on the decline. As the European country with the most severe aging population, without relevant reforms, it will be difficult to change the situation of Germany's proud manufacturing sector and its sluggish economic growth.
Additionally, affected by the "Energy Efficiency Strategy 2050," and like other European countries, Germany has faced energy supply troubles following the outbreak of the Russia-Ukraine conflict. The closure of Germany's last three nuclear power plants in April exacerbated the domestic energy crunch. Siegfried Russwurm, President of the Federation of German Industries, said in an earlier interview that, despite many German companies performing well globally, operations within the country have become exceptionally difficult due to factors such as energy costs.
