Germany has simply caught the ‘flu’, but will recover, says expert

World Finance speaks to Holger Schmieding, Chief Economist of Berenberg Bank, to discuss whether Germany's economy is on a downward spiral

October 24, 2014

Germany has long been considered the backbone of Europe, and carries many of its neighbouring countries’ shaky economies. But with the second quarter of this year seeing a decline in GDP and manufacturing orders dropping, Germany’s economy is showing clear signs of weakening. World Finance talks to a top economist about whether the wheels are coming off Europe’s heavyweight economy.

World Finance: So Holger, what’s the business sentiment in Germany today, and with the fall in GDP, are people getting nervous?

Holger Schmieding: People are getting nervous, and businesses are nervous. The underlying situation remains good to excellent. Business by and large is happy. However, dark clouds have appeared on the horizon, and as a result business are holding back from investment, and there are some signs that consumers may also hold back from buying a new car later this year.

People are getting nervous, and businesses are nervous

World Finance: Well what are these nerves, what is the impact they are having on the rest of Europe?

Holger Schmieding: Germany is much more exposed to geopolitical concerns such as Russia, Ukraine, than most other European economies. We’ve seen similar of even more pronounced downturns in sentiment in Austria and Finland, but in Spain we’ve basically seen none of that. Germany, which will likely have economic stagnation for the remainder of the year, has a bit of an impact in its neighbours. The current situation is mostly a core-European, German problem, it is the German upswing has been interrupted by geopolitical concerns, but this is not really a pan-European problem. In Spain, in the UK, the economies are less exposed to the specific geopolitical concerns that have hit Germany, and as a result these economies are now showing only a little wobble.

World Finance: Is it all down to geopolitics, or are there other reasons that Germany’s economy is weakening?

Holger Schmieding: Longer term, Germany does have some problems. I mean, who doesn’t? Germany has excessive energy prices, Germany is now introducing a minimum wage which is too high, Germany has cut the pension age for a small number of people, but that was the wrong signal. So Germany is doing a few things that you can consider economic nonsense. Having said that, these things don’t have a big impact on business investment for a while. That we have, at the moment, a German turn to stagnation, from growth of about two percent at the beginning of this year, that is in a way a one off, that is geopolitics, and Germany is by geography exposed to Russia. Germany is also, by the nature of its economy, very exposed to confidence issues, because it produces the machines, the machine tools for investment and if confidence is shaky, businesses in Germany and abroad delay investment decisions, and that registers in Germany much more than it does for instance in France or Spain.

Longer term, Germany does have some problems. I mean, who doesn’t?

World Finance: Well for Germany’s weakening economy, could this be said it’s just the boom-bust economic cycle that we’re seeing?

Holger Schmieding: There has not been any excess which would have warranted a correction. This basically is a mid-cycle interruption in what I consider is an intact up-trend. We have now a pause of probably three quarters of a year. Once the geopolitical concerns fade, and there are clear signs they are fading in Ukraine, and hopefully even in Iraq and Syria, Germany a little while later will re-emerge and will have significant growth. You can compare the current German situation to a healthy adult who unfortunately catches the flu. For a limited period of time that adult is in bed and not doing well, but 99.9 percent of the cases, that adult gets healthy again and afterwards is about as healthy as he was before contracting the flu. So Germany has an interruption in its upswing, with a small risk of a recession rather than stagnation, but once the geopolitical triggers for that are over, Germany will get out of it and return to growth rates of close to two percent.