Germany was the only G7 economy to shrink in 2023, recapturing an unwanted moniker as the sick man of Europe. The outlook is unlikely to improve materially over 2024. A slew of economic data releases for late 2023 published in early January reveal an anaemic economy. Headline HICP inflation accelerated again at the end of the year, while industrial output, retail sales, foreign trade and economic activity all declined, according to data published by the Federal Statistical Office. The net effect was a 0.3% contraction in Germany GDP last year, according to a preliminary estimate, narrowly avoiding a technical recession but marking the worst-performing major economy in 2023. “Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises”, explained Ruth Brand, head of the statistical agency.
All data points to a deteriorating economy
Inflation is probably now on a longer-term decline, although this is not yet visible in the data. At the end of last year, headline HICP inflation accelerated to 3.8% in December, driven by base effects from the government’s one-off energy subsidy from a year prior. Elevated prices caused German retail sales to plunge 2.5% in November, the largest-ever monthly decline. Annual retail sales were down 3.1% in 2023, compared to the prior year. There was a ray of hope in December’s core CPI inflation (excluding food and energy prices) data print, which dropped to 3.5%, supporting the thesis that inflation is overall trending down. Industrial production fell by 0.7% in November, the sixth consecutive month, according to the latest published figures, and was down 4.8% on an annual basis. Foreign trade declined despite falling prices, as subdued global growth and weak domestic demand. In December, exports outside the EU decreased by 4.0% compared with the prior month, and at an annual rate of 1.7%. Total annual exports fell by less than imports (1.8% vs 3.0%, respectively), providing some support to domestic GDP.
The bleak data bleeds into sentiment for the year ahead. January’s Ifo Business Climate Index suggests that Germany started the year in recessionary conditions. Near-term headwinds include lagged impacts of tighter monetary policy and anticipated sharp fiscal policy tightening which will dampen recovery hopes for private consumption and investment demand. Fiscal tightening has already received industry pushback, underscoring the delicate challenge ahead. German farmers and freight truck drivers organised a week of nationwide protests against the government plans to cut agricultural and transport subsidies. The protests led to a halt in production at the Volkswagen plant in Emden, northwestern Germany. At the same time, the outlook for external demand remains very subdued.
Contrary to this outlook, the Bundesbank, Germany’s central bank, published an optimistic set of economic forecasts back in mid-December, including modest real GDP growth (0.4%), driven by recovering export demand and private consumption. According to the Bundesbank, Germany’s stable labour market, strong wage growth and falling inflation (forecast to slump to 2.7% as energy and foot costs unwind), will enable real household incomes to increase, boosting consumption and supporting domestic economic activity. Supply chains are also tipped to renormalise. These forecasts already seem too rosy and pre-date the geopolitical flare up in the Red Sea, which has already delivered a flesh inflationary impulse and supply chain disruption risk. By comparison, Capital Economics forecasts zero GDP growth in 2024 and warns: “Residential and business investment are likely to contract, [while] construction is heading for a steep downturn and the government is tightening fiscal policy sharply.” The forecaster adds that industrial output is likely to fall further over 2024, as reduced energy costs remain very high. “Weak demand will compound German industry’s woes this year.” Germany’s former dominance as an industrial powerhouse looks a distant memory as several major industries all struggle, obscuring the optimism that the inflation fight may be nearly over. ECB president Christine Lagarde has confirmed interest rates have peaked, hinting at cuts as soon as April. Capital market and lending rates have been falling since the beginning of November, which will be supportive for refinance requirements and debt servicing costs.
Manufacturing, automotive and construction industries all struggle
Germany’s energy-intensive manufacturing sector is struggling to replace Russia’s cheap energy with a sustainable alternative to support margins and competitiveness. Germany’s mid-sized manufacturers warn they have become over-burdened by bureaucracy, while supply shortages and resource scarcity in sectors such as automotives is blocking the completion of orders. In a November survey by VDA, the German association for the automotive industry, found that around one-third (35%) of automotive companies and suppliers were planning to relocate outside Germany, driven by current sales environment and the outlook, high electricity prices and time-consuming bureaucracy. “Medium-sized automotive companies in Germany suffer immensely from excessive bureaucracy and high energy costs,” VDA President Hildegard Müller explained. “The fact that more and more companies are shifting investments abroad is a warning signal for Berlin! It is important to take countermeasures and replace the current bogging down in regulatory details with long-term strategies for more competitiveness.”
In the construction sector, demand fell 2.9% in November, compared to the previous month, as high borrowing costs made development expensive to finance, alongside elevated building costs for materials and a skilled labour shortage. All of which dampened residential and commercial development activity.
Weak demand also failed to support domestic residential house prices which slumped at an annual rate of 10.2% in the year to the end of Q3, the latest data shows, marking the steepest decline since the data series began in 2000. “Until 2022, there was a speculative price bubble in Germany, one of the biggest in the last 50 years,” explained Konstantin Kholodilin from the macroeconomics department of the German Institute for Economic Research (DIW). “Prices have been falling ever since. The bubble has burst.” Sentiment in residential construction has sunk to an all-time low in December, according to ifo Business Climate Index, and continues to deteriorate. Developers cited an uptick in order cancellations, low order backlogs and receding government subsidies. In the second half of last year, three high-profile German construction companies filed for bankruptcy, Development Partner, Project Immobilien Group and Euroboden GmbH. “Exceptionally weak expectations show that companies currently have no hope,” explains Klaus Wohlrabe, Head of Surveys at ifo. “The prospects for 2024 are bleak.” The German government expects to miss its construction target of 400,000 new apartments this year and next. Federal Building Minister Klara Geywitz reportedly says she expects 265,000 apartments to be completed in Germany in the coming year.
Credit outlook: Germany insolvencies to rise in 2024 with commercial real estate and development sectors at risk
The insolvency rate in Germany is forecast to accelerate this year, following an already sharp increase in 2023. German corporates are struggling due to domestic economic stagnation, high interest rates, rising wages, elevated energy prices and a government budget squeeze. In addition, many “zombie companies” kept afloat during the pandemic due to generous government aid and a suspension of the obligation to file for bankruptcy, are finally starting to fail. As a result, insolvencies are forecast to tick up somewhere by between 10% and 30% this year, the Financial Times reports, taking them above pre-pandemic levels.
Germany’s distressed debt market will become increasingly active in the year ahead. Highly leveraged companies with near term maturities are struggling to refinance. Real estate companies, including Signa Holding, as well as developers are under pressure from declining valuations, as a costs of capital and building materials both remain elevated.
Signa, the property group that owns almost all of Germany’s biggest department stores and part of Selfridges in London, filed for administration at the end of November, leaving lenders across the sprawling property empire racing to assess their exposure. In late January, KaDeWe, Germany’s exclusive department store which was a key tenant in Singa’s empire, filed for administration. KaDeWe was unable to pay rising rents demanded by the Signa Group and required urgent restructuring, reported the Financial Times. Julius Baer, the Swiss lender that was one of the largest lenders to Signa, saw a 52% hit in annual profits, due to its exposure to the Signa property group. Its CEO Philipp Rickenbacher resigned. The Signa corporate restructuring is expected to be one of the most complex since the financial crisis, with debt sourced to many lenders across Europe and in many forms.
An acceleration in loan defaults could endanger banks, warns Bafin, the German financial regulator, particularly lenders insufficiently diversified. Bafin calls on banks to take greater risk precautions and ensure higher provisions in order to prevent possible problems on the commercial real estate market. German banks reported diminished demand for new loans in Q4 2023, according to the Bundesbank. Loan demand is forecast to slow to 2.1% this year, according to the EY European Bank Lending Forecast, following 3.8% in 2023 and 6.9% in 2022. In real estate, the growth forecasts are lower still, at just 1.8%.
Tags: 2023, 2024, automotive, economy, Germany, inflation, outlook, real estate
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