MNI INTERVIEW2: Germany Faces Stagnation -Former Experts Chair

Germany’s economy has entered a long period of stagnation, with the positive effects of declining energy costs insufficient to offset falling output, lack of domestic dynamism and weak foreign demand, a leading former government adviser told MNI.

“Germany’s economy is stagnating. It’s even declined a little bit. It may be with data revisions that we’re even in a shallow recession,” Volker Wieland, former chair of the German Council of Economic Experts, said in an interview. ”However, we are in a long period of stagnation.”

While a decline in energy-intensive production may have concluded now that prices have eased, some industry has already shifted abroad without obvious candidates to replace it, Wieland said.

“Energy-intensive industry is not such a huge part of German industry overall. In principle, its contribution to GDP can be replaced by other sectors.The problem is that the other parts of industry that might compensate for this loss are also weak. The automotive industry is in trouble. Some companies have gone big into electric vehicles, but the competition is tough and the demand remains lower than expected.”

While surveys point to some improvement and falling output has not so far led to a meaningful rise in unemployment, much of the recovery may only be cyclical as supply side constraints recede.

LONGER-TERM TREND

I'm not optimistic about the longer-term growth trend,” he said, “There is little reason for dynamism, but things are more likely to get a bit better than a bit worse.” (See MNI INTERVIEW: Germany Faces 10-15Y Labour Shortfall -Wise Man)

The effect of geopolitics on trade and the economy remains uncertain, with conflict in the Middle East and the potential for further deterioration in the economy of China, a major customer for German goods, Wieland said.

A hoped-for uptick in domestic demand driven as real wages rise is unlikely to lead to improvements in the longer-term growth outlook, as the economy continues to be held back by structural issues, he said.

“Domestically the problem has not been lack of demand. That’s why we had high inflation, demand was greater than supply,” Wieland said. “Germany’s structural problems have certainly not been resolved, and economic policy is not helping. If anything it is making it worse, with the focus on more regulation rather than less.”

The government lacks a convincing supply-side-oriented policy, he said.

“The debt brake is not the problem: if anything, government demand has been excessive and needs to normalise.”