"We're encountering a distinct predicament unlike any we've previously faced."
From the German economy, one piece of unfortunate news after another surfaces. Econometric data is pointing sharply downwards. Nevertheless, the chief economist of prominent bank ING*, Carsten Brzeski, does not envision Germany slipping into a severe recession. In an interview with ntv.de, the economist anticipates a development we have yet to witness here.
ntv.de: The German economy has recently contracted. Econometric markers like the Ifo index for commercial sentiment or the GfK index for consumption are also trending downwards. If you had to assign a grade, how serious is the predicament of the German economy?
Carsten Brzeski: We're back at a 4 now. In the spring, there was still a hint of optimism and a touch of optimism. Surprisingly, the economy witnessed growth in the first quarter, with numerous indicators indicating an upward trend. However, lately, we notice, for instance, from May, a shift in sentiment. The Ifo index, for example, has now dipped for the fourth consecutive time. Since May, the economy's progression has turned down once again.
What's driving it? What has altered since the spring?
It's a dose of reality. The optimism of the spring was, unfortunately, overstated. Many yearned for it to be better. Thus, sentiment played a role. Additionally, there was the hope that the global economy, particularly the Chinese economy, may have performed better than predicted at the start of the year. The US economy also started off well. In Germany, the construction sector, for example, performed better than anticipated.
What transpired then?
This optimistic assessment was short-sighted. It was apparent all along that the economy would cool down. It was also clear that what we observed in the construction sector was temporary, due to the conclusion of winter. Above all, however, not everyone had understood in the spring that we have both cyclical and structural issues in our economy. The notion that all occurrences were part of the business cycle and that it would improve eventually remained prevalent.
What are these structural factors you're referring to?
What went unnoticed is that, for example, China's role has undergone a structural transformation. China has developed into a systemic competitor. Our export sector no longer gains as much from China, regardless of what's happening there economically. And we also no longer profit as much from the US economy due to increasing protectionism there. The optimists also underestimated the apprehension among the German populace. Geopolitical uncertainty has been around for a few years, but now domestic political uncertainty is added, a lack of planning security for companies and consumers, and this is due to the political process of the traffic light coalition, such as the back-and-forth with the heating law. Despite rising incomes, consumers have grown more cautious, such as in terms of employment. The number of unemployed individuals is rising, as is the number of bankruptcies. This is not a catastrophe yet, but people feel it and become more cautious in their spending.
You're painting a grim picture. What comes next? Are we heading towards a major economic crisis?
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We're in a crisis, but this crisis is not identical to those we've experienced before. We're not experiencing a recession. Regardless of whether growth is -0.1 percent or +0.1 percent, it's not too substantial. What's significant is that, considering the magnitude of our economy, we're at the same level we were before the pandemic. In other words, we haven't experienced significant growth for over four years. We're in a stagnation, similar to Japan's in recent years. A long-stagnant economy encounters problems that we haven't faced before, such as distribution issues between the wealthy and the impoverished, between the young and the old. These are structural changes that we're starting to feel and that will continue to grow.
Are there truly no signs of an economic recovery? Real incomes are increasing at a rate not seen in a long time. The labor market is holding up well despite some weakening. Couldn't this serve as a foundation to revive the economy?
There are two wild cards for the economy: consumers whose incomes are rising, and companies whose inventory levels are unusually high. Normally, these inventories would need to be reduced, and then production would resume. This could occur every month. If a few more orders were to come in, industrial production should pick up again - a little. However, these were also our wild cards for the first half of the year, and unfortunately, they didn't pay off. As for consumers, it's crucial to remember that they've had to cope with purchasing power losses due to persistent inflation for years. People will initially establish financial reserves before they start spending again. I don't want to depict an entirely bleak image: stagnation does not imply that everything is collapsing now. We will experience some growth once again at some point. However, we won't be celebrating an economic miracle 3.0 in the next few years.
The federal government frequently introduces growth packages, growth accelerators, and so on, to stimulate the economy. Or are we powerless in the face of these structural shifts in China and the USA?
These bundles from the traffic light alliance generally hit the mark, yet they fall short in some areas, specifically in terms of financial backing. These initiatives aren't substantial enough to substantially boost growth. The primary goal of effective economic policy is to establish long-term safety and consistency. For instance, there's an issue with energy policy. It's not that energy costs are excessively high, but rather that businesses lack predictability. They're unsure of the pricing landscape over the next few years. As we're in a prolonged stagnation rather than a short-term downturn, conventional Keynesian strategies won't offer much assistance. At best, they might spark a temporary resurgence. What's required are long-term investments in digitalization, infrastructure, and education. We need a comprehensive, long-term economic policy approach, not just scattered pieces like subsidies here and there or billions for a semiconductor plant. And naturally, this strategy needs to be effectively communicated. Remember, economics is said to be half psychology. This could cultivate a sense of hope that might aid us in emerging from this stagnation.
Max Borowski chatted with Carsten Brzeski
The German economy's recent GDP contraction is reflected in the downward trend of econometric markers like the Ifo index and the GfK index. Despite this, Carsten Brzeski, ING's chief economist, does not foresee a severe recession in Germany.
Even with the current GDP contraction and downward trend in econometric indicators, Brzeski anticipates a development yet to be witnessed in the German economy.
