No recession, but little relief, for German economy

Good news from the German economy has been in short supply for quite a while. From years of sluggish growth and weak data to the brutal symbolism of Volkswagen — one of Germany's most venerated corporate symbols — being potentially forced to close plants, the country seems to have reclaimed the "sick man of Europe" title it once worked so hard to shake off.

Yet this week there was a modicum of positive news. Europe's biggest economy managed 0.2% growth in the third quarter, beating pessimistic expectations which had forecast a contraction. It means Germany will avoid slipping into a recession, typically defined as two successive quarters of contraction, following a drop in the second quarter.

However, in keeping with the grim mood that has hung over the country, this week's data drop revealed that the economy shrank 0.3% between April and June, a downwards revision from the previously recorded 0.1% drop.

"Although a technical recession was avoided, the German economy remains barely larger than it was at the start of the pandemic," economist Carsten Brzeski from ING Bank said in a note.

Winter of discontent?

Other German economic data released this week has done little to lift spirits. Inflation hit 2.4% year-on-year, well ahead of the 1.8% recorded last month and also clear of the 2.1% rise forecast by analysts. That may raise some jitters in Frankfurt, given that the European Central Bank now appears to have fully embraced a cycle of aggressive rate cuts.

Unemployment stayed steady at 6% in October, according to preliminary figures released by the Federal Employment Agency. However, October is normally a month when unemployment falls and this is believed to be the first time in 20 years to show such a small drop. "The autumn upturn in the labor market has largely failed to materialize this year," said Andrea Nahles, the agency's chair.

However, some business sentiment surveys suggest a stabilization, if not quite a recovery. According to the latest survey released by the ifo Institute, an economic research group based in Munich, business sentiment improved in October, the first rise in four months.

"This stabilization is clearly positive, it's a good sign," Clemens Fuest, ifo Institute president, told DW. "Is it a change in trend? That's too early to say, so we'll have to see if that continues in the months to come. But companies do tell us that for the next six months, they at least don't expect the situation to worsen further."

That moderate sense of optimism is backed up by a surprising increase in German retail figures for September, with sales rising by 1.2%, ahead of forecasts.

Yet one doesn't have to look too far to find yet more downbeat data. The latest survey from the German Chamber of Industry and Commerce (DIHK), also released this week, described an economy that was "losing ground in Europe and internationally."

"Too little investment, too much bureaucracy, and excessively high location costs: the German economy is stuck," said Martin Wansleben, the chamber's chief executive.

He said many companies believe the situation will only get worse next year. "For 2024, we're lowering our forecast to at best 'zero growth'," he said. "For the coming year, we only expect zero growth as well. This would be the third consecutive year without real GDP growth!"

Government struggles to find a solution

The malaise is now so well-established that it has become a matter of urgency for the country's deeply unpopular three-party coalition government.

On Tuesday, Chancellor Olaf Scholz held a highly choreographed "industrial summit," which invited business and union leaders to come together to figure out ways out of the crisis.

However, the gathering itself underlined how political division undermines attempts to improve the situation. Neither Robert Habeck, the economy minister from the Green Party, or Christian Lindner, the finance minister from the liberal Free Democratic Party, were present. Both were promoting their own parties' economic policies at separate events on the same day.

While there is profound disagreement within the coalition over how to improve the economic situation, there appears to be consensus among many experts on the core causes of the crisis — and it's a long list.

"At the risk of sounding like a broken record, the current state of the German economy is the result of both cyclical and structural headwinds," said Brzeski.

The central view is that the COVID pandemic and the war in Ukraine have fundamentally exposed Germany's export-driven business model, with rising energy costs and widespread inflation causing havoc for many sectors.

Reliance on both Russian hydrocarbons and China as a huge market for exports has come back to bite Germany, while decades of underinvestment, exacerbated by rigid debt-brake and spending rules, has led to a range of problems, from crumbling infrastructure to an economy that has fundamentally failed to embrace digitalization and innovation.

Now the sight of Volkswagen — the flagship German company in the country's flagship carmaking industry — struggling so badly seems to have epitomized the whole problem.

At least Economy Minister Habeck was able to take some crumbs of comfort from this week's data. "This is still far from what we need, but at least it is a ray of hope," he said. "The economy is proving more robust than previously forecast."

However, Germany's obvious vulnerability to events elsewhere — from China, to the US, to Ukraine — combined with the infighting at the heart of the government means there is a little hope of a turnaround in the near future.

"Today's GDP data brings welcome relief to the battered German soul," said Brzeski on the day of the release. "However, it doesn't take away the fact that the economy remains stuck in stagnation. At least it is not falling into a severe recession. It's the small things that matter these days."

Edited by: Uwe Hessler