German economy
.
Heller has made crankshaft machines at its base in south-west Germany for almost 130 years, yet like many midsized manufacturers, its chair Klaus Winkler is losing faith in his country’s competitiveness.
Along with taxes and surcharges that have long been among the highest in Europe, companies such as his now face high energy costs and a labour force that works among the fewest hours in the OECD.
“Nobody works less than Germans,” he said, adding that the quality of candidates for its apprenticeship scheme is “way below what we got 10 years ago”.
German industry has gone from being the powerhouse of Europe’s economy to one of the region’s worst performers after a series of shocks, including the pandemic’s disruption of global supply chains and the power crisis unleashed by Russia’s full-scale invasion of Ukraine.
These setbacks have compounded longer-running structural problems, including labour shortages, rising barriers to trade, increased bureaucracy and a lack of investment in transport, education and digital infrastructure.
Industrial production in the country fell 2.1 per cent in July from a year ago. This extended a decline that has lowered the sector’s output by 12.2 per cent since the start of 2018. Germany’s most energy-intensive sectors have suffered an even bigger decline of 20 per cent.
Line chart of Official data measuring Germany’s industrial output (index 2015 = 100) showing Higher energy costs have hit parts of German industry hard
“There is a cyclical downturn. Then on top of that there are the structural issues,” said Clemens Fuest, president of Munich’s Ifo Institute, one of Germany’s top economic research bodies. “This is the combination that leads to the gloom we see today.”
Economists like him worry that the industrial fabric of Europe’s largest economy risks being slowly eaten away as more companies shift production and investment abroad.
In line with that, Winkler told the Financial Times that Heller planned to reduce dependence on Germany and build up more presence in Asia and the US. The manufacturer of machines for crankshafts, a vital component of petrol and diesel engines, even plans to expand its UK site in the Midlands town of Redditch, despite the complications of Brexit, because of its “big competitive advantages” in cheaper labour costs compared with its headquarters in Nürtingen.
Others are making similar moves, with figures from the German Chamber of Commerce and Industry finding that almost a third of companies surveyed favoured investment abroad over domestic expansion.
“I don’t want to talk ill of Germany, but it feels like everything is a bit tired here,” said Gert Röder, who is the sixth generation of his family to run a 208-year-old aluminium foundry based in Soltau in the north.
The bulk of his investments this year would go into an existing factory in the Czech Republic, which — unlike Germany — has chosen not to phase out nuclear power, rendering energy costs a little cheaper. “They also have a great labour force,” he added.
Economists worry about politicians’ capacity to act forcefully, with Fuest pointing to divisions in the coalition government, led by Chancellor Olaf Scholz, over whether to introduce a subsidised electricity price for energy-intensive industries.
Concerns abound over the government’s decision to prioritise industries such as semiconductors and construction, both of which have received multibillion-euro subsidies and tax breaks, over its traditional expertise in areas such as chemicals, which are suffering badly from the rise in power costs.
BASF, the world’s biggest chemicals company, chose to build a new €10bn petrochemicals plant in China while downsizing its sprawling headquarters on the banks of the Rhine in Ludwigshafen.
“Companies don’t understand why Germany highly subsidises some sectors, like chips, but seems prepared to let others go,” said Fuest.
BASF’s new €10bn petrochemicals plant in Zhanjiang, China. It is downsizing its headquarters in Ludwigshafen © BASF
Germany’s carmaking prowess is also under threat from China. The Asian economy’s success in producing electric vehicles has meant that last year it overtook Germany as the world’s second-largest exporter of cars by volume.
While foreign sales are up overall, business with China — a key source of growth in recent decades — has collapsed.
Shipments to its second-largest export market, after the US, fell 8.1 per cent in the first seven months of this year from the same period in 2022.
The uncertainty surrounding Germany’s political and economic ties with China have raised concerns about how well the export-dependent sector can hope to do over the coming years.
Line chart of China as a % of total German exports (January to July) showing German exports to China are falling
BASF reported a near 60 per cent drop in second-quarter profits from a year earlier, naming China’s weakening economy as a significant factor. The German downturn has weighed on the rest of the eurozone, where official data on Wednesday showed industrial production in July was down 1.1 per cent from the previous month and 2.2 per cent from a year ago.
Others think the gloom is overdone.
Some sectors — chiefly defence — are experiencing unprecedented demand, with companies such as Rheinmetall and Renk posting record figures as the war in Ukraine boosted military spending across Europe.
Markus Krebber, chief executive of energy group RWE, which raised its profit outlook in July on the back of strong performance as Germany’s biggest power producer, said he disagreed with the current “alarmist” tone. “There are challenges and we have to address them. But I do not share this overall negative picture,” he said.
Can Germany fix its economy?
Krebber, who also sits on an advisory board of Germany’s biggest business association, the BDI, called for an end to “short-term activism”, focused on subsidies for certain sectors, in favour of reforms that enable longer-term growth.
“Let’s talk about the tax system, let’s cut down bureaucracy. We need to push for digitalisation, and also get skilled workers into Germany and improve our educational system,” he said.
For all the chaos associated with Scholz’s coalition, there was not a “huge difference” between the effectiveness of the German government’s industrial policy and that of its European counterparts.
“A lot of Germany’s problems are fixable,” said Fuest. “So let’s get on and do it.”
![[sun]](http://storage.proboards.com/6870873/images/xxbZAntehYJKWsTebBax.gif)
