Angela Merkel

Europe’s largest economy might suffer crisis

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The German economy, which is the largest among European countries, is moving towards a recession, German manufacturers are sure.

Orders at factories and service companies have fallen at the fastest pace in six years, and now more and more companies are expecting output to fall rather than increase over the next 12 months.  This will be the first fall since 2014.

The most pessimistic picture is taking shape in the automotive industry.  It is due, in particular, to an escalation of tension in world trade and a decrease in demand in China.  Manufacturing employment declined at the fastest pace in seven years.

The European Central Bank (ECB) has already begun to lay the foundations for further stimulating monetary policy and is expected to lower interest rates at the next meeting in three weeks.  In Germany, the government took only preliminary steps towards a tax incentive program.

The main reason for the growth of savings in Germany and the weakening of investments is the displacement of a large part of the national income from households to firms, which also reflects the very weak wage growth among low- and middle-income people.

According to the IMF, household consumption in Germany fell from about 63% of GDP in 2005 to 51% in 2018.  At the same time, weak domestic consumption did not provide companies with enough incentives to invest in the German economy.

Foreign demand for German goods is currently declining, which slows down the country’s economy.  But Germany has no reason to turn back into the “Sick Man of Europe.”

The biggest problem of Germany is connected with its domestic policy, and not with the worsening international situation.  Germany can easily enough ensure an increase in domestic consumption and offset the weakening of external demand.

It was previously reported that investors had lost faith in Germany’s economic prospects.  The largest economy in Europe contracted in the second quarter of this year – a slowdown in global growth and uncertainty due to the trade war between the United States and China.

Many German economists, and not just leftists, are currently urging the government to reform its constitutional commitment, eliminating the possibility of borrowing to finance a structural deficit in excess of 0.35% of GDP.

The German economy is not going to fall off a cliff, but it is unlikely to be able to regain decent growth without significant reforms.  Germany needs not only to increase government spending and investment, but also to take concerted actions aimed at increasing domestic consumption, so that companies have an incentive to invest in Germany.

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