"We're dealing with a distinct predicament unlike the one we're accustomed to"
CNN Business: The German economy recently experienced a decline. Signifiers like the Ifo index for business sentiment and the GfK index for consumption are also trending downward. If you had to assess it, how severe is the situation of the German economy?
Carsten Brzeski: We're back at a grade of four now. There was a certain optimism and optimism in the spring. Surprisingly, the first quarter saw growth, and various indicators were pointing up. However, lately, the mood has shifted, as shown by the Ifo index falling for the fourth month in a row since May. The trend of the economy is heading downward again.
What caused this shift? What has changed since the spring?
It was a reality check. The spring optimism was, unfortunately, overblown. Many people wanted things to be better, so there was a psychological element to it. From a content standpoint, there was hope that the global economy, particularly the Chinese economy, might perform a little better than initially feared at the start of the year. The US economy was also getting off to a good start. In Germany, for example, the construction sector was doing better than expected.
What occurred then?
This optimistic analysis was impulsive and short-sighted. It was clear all along that the economy would cool down. It was also clear that the construction sector's growth was temporary, due to the end of winter. Above all, people failed to recognize in the spring that we had both cyclical and structural problems in our economy. There was still the notion that all developments were a part of the business cycle and that things would improve eventually.
What are these structural factors you're referring to?
What many failed to notice is that, for example, China's role has structurally changed. China has become a systemic competitor. Our export industry no longer benefits as much from China, regardless of what happens there economically. And we're not benefiting as much from the US economy due to increasing protectionism there. The optimists also underestimated the uncertainty among the German population. Geopolitical uncertainty has been present for a few years, but now there's also domestic political uncertainty, a lack of planning security for businesses and consumers. This is due to the traffic light coalition's policy, such as the heated debate over the heating law. Despite rising incomes, consumers are becoming more cautious, such as regarding the labor market. The number of unemployed people is increasing, as are insolvencies. It's not dramatic yet, but people are feeling it and becoming more cautious with their spending.
That's quite a grim picture you're depicting. What's next? Are we heading towards a severe economic crisis?
We are in a crisis, but it's a different kind of crisis than we've known before. We're not in a recession. Whether growth is -0.1 percent or +0.1, it doesn't really matter. What's crucial is that, given the size of our economy, we're currently around the same level we were before the pandemic. In other words, we haven't grown on average for over four years. We're in a state of stagnation, much like what Japan has experienced in recent years. A long-stagnant economy faces problems we haven't encountered before, such as distributional issues between the rich and the poor, between the old and the young. These are structural changes that we're already beginning to feel, and they will only continue to grow.
Are there no indications of an economic recovery? Real incomes are rising at a rate not seen in a long time. The labor market is holding up well, despite some decline. Couldn't this serve as a foundation for restarting the economy?
There are two cards the economy has been playing: consumers with rising incomes and companies with unusually high inventory levels. Normally, these inventories would need to be reduced, and production would resume. This could happen every month. If only a few more orders were to come in, industrial production should rebound a bit - just a little. However, these cards didn't play out in the first half of the year, unfortunately. When it comes to consumers, it's crucial to remember that they've had to deal with several years of purchasing power losses due to high inflation. People will first build up financial buffers before they start spending again. I don't want to paint an overly grim picture: stagnation doesn't mean that everything is collapsing now. We will have growth again at some point. But we won't be celebrating an economic miracle 3.0 in the next few years.
The federal government regularly introduces growth packages, growth boosters, and so on, in an attempt to get the economy moving. Or are we simply at the mercy of these structural developments in China and the USA?
These bundles from the traffic light alliance are on the right track, yet they often fall short in the power department, that is, finances. These bundles aren't substantial enough to make a significant impact on expansion. The primary function of solid economic policy is to ensure long-term safety and consistency. This is where it falls short, especially in energy policy. The issue presently isn't that energy costs are exorbitant, but rather that businesses lack predictability. They're unsure about the price level in the forthcoming years. Given that we're in a protracted stagnation rather than a temporary economic downturn, conventional Keynesian strategies won't offer much relief. At best, they might spark a brief revival. What's needed are extensive investments in digitalization, infrastructure, and education. We require a comprehensive, long-term economic strategy, not scattered measures here and there, a subsidy here, billions for a semiconductor plant. And naturally, this strategy needs to be effectively communicated. Keep in mind, economics is half psychology. This could foster a sense of optimism, helping us break free from this stagnation.
Max Borowski held a discussion with Carsten Brzeski.
The decline in Germany's economy is reflected in its GDP, which has shown little growth over the past four years. Despite the federal government's growth packages, the structural challenges in the economy, such as increased protectionism in the US and China's changing role as a systemic competitor, are causing concerns about long-term stagnation.
