After five years of de facto stagnation, last year finally brought broad awareness in German politics and society that the economic problems are not just cyclical. The country is still one of the richest economies in the world, but it needs an overhaul to stop its gradual deterioration. Just addressing the main issues of energy, China and competitiveness will be a challenge. Add to this unfavourable demographics and the impact on healthcare and pension systems and it’s clear that there is no easy way out of the current situation.
In the absence of any new policy initiatives after the elections, the German economy looks set for another year of stagnation and possibly even a third consecutive contraction. A sad new record.
Looking at the economic ideas of the political parties, it is becoming increasingly clear that even in a best-case scenario with reforms and investments, any new government will not try to overhaul the old economic business model, but rather try to rejuvenate the old one. Less red tape, some tax cuts to stimulate spending and investments, possibly attempts to lower energy costs and infrastructure investment – all of which feature in any European economist’s wish list, and a growth booster for the economy; at least temporarily. However, a closer look at the proposals shows that they are often rather superficial and that the financing of the ideas is anything but solid.
Our hope still is that any new German government will decide on a longer-term plan for economic reforms and investments. Just to make up for the investment gap accumulated over the last decade, Germany would need additional investments of 1.5% GDP per year over the next 10 years. This is not all public investments, but the government will have to play an important role in providing public goods like infrastructure and education and creating incentives for private investments. This is why in our base case scenario, we see some reforms combined with infrastructure investments after the elections. If we are right, this should bring at least a small boost to confidence and growth from the second half of the year onwards.
Whether these measures will be sufficient to compete against China and the US is a completely different question. What Germany gets after the elections is a refurbished model of its economy – better than the old one with cracks, battery failures and very few gadgets, but also not a brand-new, dazzling model that leaves the competition speechless. The biggest risk we are currently seeing is that the political system in Germany will be even more fragmented after the elections, making coalition negotiations complicated and increasing the risk that any new government will start with the smallest instead of the largest common denominator.
To make the German economy great again, the country will need time. A decline that spanned more than a decade cannot be turned around in a few months. The February elections will be crucial for the fate of the economy. It simply cannot afford further stagnation.