When Werner Lieberherr looks at the global economy, he sees nothing but red flags. “Brexit is a mess, China is slowing, the US is losing altitude,” he says. “We’ve definitely passed the peak of global growth.”
That is potentially worrying for the company he runs, Mann + Hummel, a producer of filter systems based in south-western Germany which employs 20,000 people. Like most of his peers, he is highly reliant on exports. Yet the markets he sells into are looking increasingly fragile.
“From a geopolitical risk perspective, the [US-China] trade wars, populism in the EU, Brexit — these are all major concerns for me at the moment,” Mr Lieberherr says. To get ahead of the coming downturn he has just announced a €60m cost-cutting programme at the family-owned business that could involve steep job cuts.
Mann + Hummel is not alone. Thousands of companies in Germany are bracing themselves for a slowdown in their biggest markets which could have big implications for the country’s economic prospects. The government in Berlin now expects growth in gross domestic product of just 1 per cent this year, down from an earlier estimate of 1.8 per cent. That would be the weakest number since 2013.
The slowdown has exposed a thorny problem for Germany. An export champion, it has been one of the biggest beneficiaries of globalisation, free trade and open borders: exports are equivalent to 50 per cent of its GDP. “Germany is more deeply entwined with the global economy than perhaps any other country,” says Olaf Scholz, the finance minister. “Our prosperity, jobs, social infrastructure depend on our continued ability to sell our products to the rest of the world.”
Yet its export success also makes it uniquely vulnerable to external shocks. As a result, Donald Trump’s showdown with Xi Jinping, America-first protectionism and weakening growth in big markets like China — whose GDP expanded by just 6.6 per cent last year, the lowest rate since 1990 — are taking a much bigger toll on Germany than on other countries such as France.
“The big question is: do we still have the right international political framework for an economy like ours that is so open to the world?” says Michael Hüther, head of the German Economic Institute in Cologne. “That’s a question that we never had to discuss in the past, but we’re discussing it now.”
The signs that Germany’s export juggernaut may be sputtering are beginning to pile up. Germany only narrowly avoided a technical recession last year after its GDP shrank by 0.2 per cent in the third quarter but remained static in the fourth quarter. Over the year, growth came in at a disappointing 1.4 per cent, compared with 2.2 per cent in 2017.
Meanwhile in December, new factory orders and exports declined, while industrial output unexpectedly fell for the fourth consecutive month, amid weaker demand from abroad. In the same month, retail sales fell by the fastest rate in 11 years.
It is now clear that after nine years in the economic stratosphere, Germany is returning to earth with a bump. “Industrial output and employment have been rising in a more-or-less straight line since 2011, which is, in itself, astonishing,” says Mr Hüther. But global insecurities have thrown a “spanner in the works”.
The mood in German boardrooms has soured markedly. The business climate index compiled by the Ifo Institute in Munich fell from 101 points in December to 99.1 in January, its lowest level in three years. “The boom has fizzled out,” says Thorsten Polleit, chief economist at Degussa-Goldhandel. “We’re seeing a return to harsh reality.”
Yet there are two sides to the story: while industry is seeing a downturn, much of the rest of the economy is doing well. Many fundamentals continue to be strong: employment is at a post-reunification high; household spending is healthy; and wages and pensions have been rising at rates above inflation. Borrowing costs remain low and some recent social giveaways should act as a small fiscal stimulus.
“Domestic demand is still very strong,” says Klaus Deutsch, head of economic policy research at the BDI, the main German business lobby. “Investments in construction, in equipment are still robust, as is private consumption. So in domestic terms the economy is still in expansion mode.”
The optimists claim that the dip at the end of last year was caused by temporary factors which have now eased. One is the new emissions standards introduced last September which created huge bottlenecks in the car industry, forcing companies to cut back production. Another is the abnormally low water levels in the Rhine, which disrupted shipments of chemicals.
That’s why ministers are so sanguine, at least in public. “In contrast to most of our European neighbours, Germany has now had nine straight years of economic growth — the longest such uninterrupted run since 1966,” says economy minister Peter Altmaier in an interview.
External factors such as the US-China trade conflict and Brexit have clouded the picture, he says. “For the second time since 2013 we are seeing growth temporarily weaken,” he adds. “But we are still in an upswing — and I think it can continue for the foreseeable future.”
That dichotomy between the domestic situation and the external environment explains why many companies have yet to really feel the impact of the slowdown. A recent survey by EY found 65 per cent of Mittelstand firms — the small and medium-sized enterprises that are the backbone of the economy — were “thoroughly satisfied” with the state of their business — 4 percentage points more than a year ago, and the highest level since the survey started in 2004.
Nearly a third wanted to invest in new machines or building, and 39 per cent to hire new workers. “The geopolitical tensions clearly are much less of a worry for the Mittelstand than for the big industrial companies,” says EY partner Michael Marbler.
One outfit that symbolises the positive mood is HAWE Hydraulik, an engineering group in Munich that makes hydraulic components and systems. HAWE had a record year last year, with revenues of €363m. Its chief executive, Karl Haeusgen, says the situation in the machine-building sector is “good to very good”.
“But there’s an ambivalence there,” he continues. “Currently things are going well, but there are big political risks around that could have economic consequences.” If the US-China trade conflict escalates, “it will definitely trigger a slowdown in the global economy,” he says. “And uncertainty always affects the capital goods sector.” Even if the world doesn‘t slide into a trade war, he says HAWE will see revenue growth of just 3-5 per cent this year, compared with 17 per cent in 2018.
Holger Bingmann, head of the BGA, Germany’s trade federation, says: “It’s not that the real economic and industrial indicators are negative — it’s more just a sense of fear and uncertainty. It’s normal for growth rates to slow down. But our members worry we might soon be facing some really serious problems, such as a hard Brexit or an all-out trade war. That’s the reason for the disquiet.”
Britain’s departure from the EU is a particular worry. Researchers from the Leibniz Institute for Economic Research said last week that a no-deal Brexit would threaten more than 100,000 German jobs. They calculate that 15,000 jobs in the German car industry alone depend on export to the UK.
The worsening environment is not only affecting Germany. Last month, the European Central Bank said the outlook for the whole of the eurozone economy had clearly “moved to the downside”. The ECB said that as a result of global trade tensions, Brexit and financial market volatility, a slowdown it had thought would be temporary could end up being more long-lasting.
“A lot of it is trade,” Benoît Cœuré, a member of the bank’s executive board, said when asked to explain this “shock to eurozone growth”. “A lot of it comes from the outside.”
Carmakers are already feeling the pressure from these external factors. They have been directly affected by a decline in China, where 2018 car sales fell 2.8 per cent to 28.1m — the first contraction in the market since the 1990s. Forecasts had predicted growth of 3 per cent.
The trade conflict between the US and China is adding to their concerns. When Beijing raised tariffs on US-built cars from 15 to 40 per cent last July, that hit German cars too, such as the thousands of sport utility vehicles which BMW exports to China from its factory in South Carolina. The tariffs also affected SUVs made by Daimler in Alabama.
These were some of the “strong headwinds” that Daimler chief executive Dieter Zetsche said had buffeted the company in 2018 and triggered a 29 per cent drop in net profit for the year. Other factors such as slowing demand for cars in Europe and North America and high investment in electric vehicles didn’t help. Daimler also announced it was cutting its dividend — for the first time in nine years.
Things could get even worse if Mr Trump fulfils his threat to impose tariffs on imports of European cars. German car exports to the US would halve in the long term if such levies were imposed, according to Ifo. “These tariffs would reduce total German car exports by 7.7 per cent, or by €18.4bn,” says Gabriel Felbermayr, head of Ifo’s centre for foreign trade.
So far, the slight downturn has not affected Germany’s public finances. The government — federal, regional and local — generated a massive surplus of €59.2bn last year, equivalent to 1.7 per cent of GDP, and up from €34bn in 2017. High employment has translated into surging payroll taxes and social security contributions: that combined with low interest rates has been a boon for Germany’s exchequer.
But Mr Scholz, the finance minister, has repeatedly warned that the age of massive tax windfalls is nearing its end. As the economy slows, tax revenues will decline. Indeed, his officials earlier this month revealed a funding gap of €24.7bn between 2019 and 2023, largely because tax receipts will be on average €5bn less a year than had been expected.
Some serious belt-tightening may be needed to balance the books, Mr Scholz says. “Wherever there are additional spending requests, we will have to make savings somewhere else,” he says. “We can afford a lot, but not everything, and not at the same time.”
This new, tougher line comes at a time when Germany was supposed to be turning on the taps. It has pledged to increase defence spending and investment in education, while a government commission just proposed that Germany phase out all of its coal-fired power stations by 2038, a process that will cost taxpayers €80bn over the next 20 years. It is still not entirely clear where that money will come from.
At the same time, pressure is building for corporate tax cuts to ease the coming downturn. “We must create the right conditions for the boom to continue,” Mr Altmaier says. “That means more [investment] incentives and a better fiscal environment for companies.” He points to the big US reform of corporate tax. “This is something we will have to discuss, too.”
With Mr Scholz cautioning restraint, a series of bust-ups looms over tax and spending priorities that could vastly increase tensions among the partners in chancellor Angela Merkel’s coalition. As the economy cools, the political debate in Berlin is about to heat up.
National champions A strategy to cope with intensified competition
Concerns about Germany’s current slowdown are feeding into a bigger debate about the future of the economy — and whether it risks losing out in the long term against powers such as China.
Germany’s excellent growth rates were “not God-given”, Peter Altmaier, economy minister, said earlier this month. “It is constantly being challenged by international competition and the arbitrary interventions of other states and companies”. He added that it must be “constantly earned anew”.
His response to the China challenge was contained in a new industrial strategy unveiled to much fanfare this month. National champions should be protected and promoted, he said, in part through loosening EU competition rules. The state, he said, should be allowed to take temporary ownership of companies threatened with hostile takeover by Chinese firms. Liberal economists accused him of protectionism and trying to dismantle the free market.
Meanwhile, experts are asking a more pressing question: is Germany heading for a recession, or just a return to normality? “The boom was unusually long, but it has run out of steam,” says Michael Hüther of the German Economic Institute. “Now we’re seeing the correction.”