The end of Germany's economic miracle

published 30 October 2014

Any hopes that German growth is set to stage a recovery were dented by the latest set of statistics from the eurozone's largest economy. The closely watched Ifo business sentiment survey tumbled to 103.2 in October, from 104.7 the previous month. That was its sixth consecutive decline and the lowest reading since December 2012.

Both exports and domestic consumption appear to be struggling. GDP contracted in the second quarter of 2012 and many economists expect third-quarter figures due in early November to show a second successive decline. The IMF recently cut its forecast for growth in 2015 to 1.5%.

What the commentators said

"Europe's economic powerhouse is losing its lustre," said Olaf Storbeck on Breakingviews. The problems besetting Germany are structural, not cyclical.

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It's easy to blame the Ukraine crisis, sanctions in Russia and sluggish growth in Europe, but that's only half the story. The benefits from reforms in 2003 that "reinvigorated that labour market" have run their course and unemployment could soon be ticking up again.

The "private sector's persistent investment freeze" drags down domestic demand and hobbles long-term growth. "Dismal demographics will dampen growth as well"; many employers are already struggling to find skilled workers.

Yet, "Angela Merkel has not woken up to the country's fading economic miracle". "Misguided policies", such as incentives for early retirement, more generous pensions for mothers, a badly designed minimum wage law and the goal of running a balanced budget threaten to "add extra burdens".

This state of affairs isn't just a problem for Germany, added The Economist. "Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years."

True, Berlin isn't the only one at fault; consistent reform-dodging by France and Italy shares the blame. But for the good of the whole eurozone, Germany must stop being "obsessed with deficit reduction for all governments" and increase public spending in order to avoid the looming threat of deflation.

Paradoxically, then, the one reason for hope is that if German data continues to disappoint, policymakers may finally respond to demands for a fiscal boost, said Capital Economics' Jennifer McKeown. "But such calls seem to be falling on deaf ears so far."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.