Throughout most of this century, Germany consistently achieved economic
success, asserting its dominance in global markets for premium goods,
including luxury automobiles and industrial machinery. The nation’s robust
export activity powered nearly half of its economic output, contributing to
a thriving job market, and bolstering the government’s fiscal reserves
while other European countries grappled with mounting debts. Germany’s
accomplishments were widely touted as a model for other nations to emulate.
However, this paradigm has shifted. Presently, Germany finds itself as one
of the worst performing major developed economy in the world, as both the
International Monetary Fund and the European Union anticipate a contraction
in its economic output this year. The primary catalysts for this shift are
Russia’s invasion of Ukraine and the subsequent disruption in the supply of
affordable Russian natural gas, which has historically fuelled Germany’s
energy-intensive industrial sectors, cementing its position as Europe’s
manufacturing powerhouse.
Germany faces the impending risk of “deindustrialization” due to the
confluence of elevated energy costs and governmental inaction on persisting
issues that may encourage the relocation of new manufacturing facilities
and high-paying employment opportunities elsewhere. The loss of cheap
Russian natural gas required for industrial operations has inflicted
substantial damage on the economic model of Germany.
After Russia’s decision to curtail the supply of natural gas to the
European Union, an energy crisis gripped the bloc, which had hitherto
sourced 40% of its fuel from Moscow. The cost of natural gas has
approximately doubled compared to 2021, negatively affecting companies
reliant on it.
It appears that Germany won’t escape a second recession this year as the
economy undergoes a persistent industrial weakness. German industrial
production dropped again in August for the fourth consecutive month and is
now more than 7% below its pre-pandemic level.
The German economy has not being stimulated by large deficit spending by
the government like in the United States, therefore the country is now
contemplating another quarter of declining GDP. The economy is widely
expected to shrink this year and grow modestly in subsequent years.
Source: TradingView
Gross domestic product declined 0.2% in the September quarter and will
probably fall a further 0.1% before year end. Forecasts show Germany GDP
will drop 0.4% in 2023 and rebound merely 0.5% next year. This bounce is
significantly weaker than the previously expected 0.9% and 1.3%
respectively, from the International Monetary Fund.
Regardless of the outcome next year, Germany’s economic prospects continue
to be grim as there are long standing challenges to growth. The country
needs structural reforms in regard to energy prices, infrastructure,
immigration, and so on.
The ECB’s next decision is on the 26 th of October, and while
markets are widely expecting interest rates to remain on hold this month,
the prospect of another final rate hike by year end is on the cards.
According to new economic poll the European Central Bank won’t lower
interest rates until September 2024.
Despite the economic challenges the country faces, the German benchmark DAX
40 index is trading near its all-time high. However, we note some ominous
signs developing on the chart over the past two months, raising the
question if the current bull market is sustainable. A large bearish
divergence has formed throughout 2023 showing that internal momentum
conditions are weak. The long-term up trend line and key support of 15,456
have both been broken down recently, suggesting that lower levels could
unfold in the months ahead.
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