Is there any good news for the German economy?

This article is transferred from the author | Zhang Dongfang

Overall, in the current economic situation, German companies tend to invest less rather than more.

As the end of the year approaches, it's time to write "Germany is a little cold this winter", last year because of the surge in natural gas prices during the heating peak, this time, Germany's old diseases have not been cured, and new ones have been added: the government budget crisis, the lack of willingness to invest by enterprises, the precipitous decline in the innovation momentum of enterprises, and so on. Faced with a huge budget shortfall, German Chancellor Olaf Scholz once again quoted the phrase "You will never walk alone", as it was last year when energy prices were high. He wanted to promise that the government would keep the promises it had made to the people, and that he would not ignore anyone. This can also be used to describe the current situation in Germany, which is that one crisis does not leave another alone.

According to a new research report published by the IFO Institute for Economic Research, German companies have significantly scaled back their investment plans. According to the agency's November business survey, the IFO investment plan index fell from 14.7 points in March to 2.2 points in November. The index measures the proportion of companies that plan to invest more, but does not cover the exact amount of investment. Lara Zarges, an ifo expert, said: "The apparently gloomy investment climate is caused by rising financing costs, weak demand and economic policy uncertainty. Firms are also cautious about investing in the coming year, with the investment plan index even lower than this year, at 1.2 points. The most pessimistic is in the trading sector, where more and more businesses intend to reduce their investment. Manufacturing is still the most optimistic sector, with most companies planning to increase investment this year and next, but by a smaller pace than originally planned, especially for energy-intensive companies. Overall, in the current economic situation, German companies tend to invest less rather than more.

The report released by the IW Institute of Economics in early December also showed a rather pessimistic picture. The agency's business climate survey conducted this autumn shows that the German economy will continue to be weakened after the shock. Business conditions have deteriorated significantly in 2023, especially in the manufacturing and construction sectors. Business expectations for 2023 are in the doldrums, returning to the levels of autumn 2022. According to the report, 23% of companies plan to expand production in 2024 and 35% reduce production, similar to the autumn of 2022, when energy price shocks, high inflation and energy shortages were worried. The sluggish investment situation over the years is not expected to improve in the coming year. Protracted economic shocks and long-delayed uncertainty are also reflected in the job market, with the report suggesting that Germany's long-standing boom could be coming to an end. Only 20% of companies surveyed said they were likely to add jobs in the coming year, and 35% planned to lay off employees.

Not only is the willingness to invest in production sluggish, but also the motivation to invest in R&D, which represents the future. According to a survey of more than 2,200 companies conducted by the German Chamber of Commerce and Industry (DIHK) between July and September this year, the ongoing crisis and the economic difficulties caused by the crisis have caused German companies to innovate at their lowest level since the survey began in 2008. The last survey took place three years ago, when about half of companies planned to increase innovation, compared to about a third today, and 15% even plan to reduce their investment in innovation in the next 12 months. The biggest obstacle to innovation is the lack of skilled workers, especially in the manufacturing and construction sectors. This is followed by excessively high compliance requirements, including approvals, data protection, etc., the so-called bureaucracy, which is most affected by the chemical and pharmaceutical industries. Martin Wansleben, chairman of DIHK, said that companies are focusing their investments on their core business and are struggling with how to enforce a large number of regulations and guidelines, and they no longer have the energy and resources to develop new products or services.

The German Federal Government has set a target of 3.5 percent of GDP by 2025 for all R&D spending. Currently, the German government, companies and universities collectively spend 3.1% of GDP on R&D. According to the DIHK survey, since 2017, German companies believe that the conditions for innovation have deteriorated. Additional requirements, including sustainability reporting obligations and EU supply chain law, will only make compliance requirements more difficult to innovate, the report says. Bureaucracy is also reflected in the public funding programs used to support R&D. In terms of R&D funding sources, 76% of the surveyed companies said that they came from their own funds. Publicly-funded programs from the European Union, the German Federal Union and the Länder are becoming less attractive, due to the complexity and time-consuming nature of regulations and applications.

An equally alarming phenomenon for Germans is the fact that companies are moving their R&D activities out of Germany. In DIHK's last survey, a quarter of the companies surveyed planned to increase their R&D capabilities abroad, and this time the figure is one-third, especially for companies with more than 500 employees. According to Wansleben, there is an urgent need to continue to generate new products and ideas "Made in Germany" in order to put the German economy on its footing. The premise of Germany's existence as an economic base is the innovation of companies.

Some time ago, most economic forecasts have lowered their forecasts for the German economy, and most of them forecast negative GDP growth in 2023, and 2024 will begin to see the clouds, turning from negative to positive. In the OECD's forecast for 2023 economic growth in 2023, released in September, Germany ranked second-to-last, ahead of Argentina. At the beginning of November, the German GDP forecast for 2023 was -0.4%, and in 2024 it will grow by 0.7%, which in March is 0.2% in 2023 and 1.3% in 2024. Economists at Commerzbank are the most pessimistic, believing that the German economy will not be able to escape the recession and continue to shrink in the coming year, with the German economy shrinking by 0.4% in 2023 and 0.3% in 2024 in their forecasts.

Forster, the director of the IFO, recently described the state of the German economy as "Germany is going backwards", and his economic research institute IFO predicts that the German economy will shrink by 0.6% this year, the only country among all G7 countries that has not seen economic growth. In a recent debate about whether Germany's industrial model is outdated, Forster pinned his hopes on Germany's small and medium-sized enterprises, which are often the world's hidden champions. According to the IWD, in 2020, Germany accounted for 1,573 of the world's approximately 3,400 leading hidden champions, which are economic stabilizers in crisis. Between 2015 and 2020, the number of hidden champions in Germany increased by a fifth, despite the impasse of globalization. Many companies tend to be family-owned businesses that are more than 100 years old, mainly from the manufacturing sector. Interestingly, 56% of the world's hidden champions are concentrated in the German-speaking countries of Germany, Austria and Switzerland. The reason for this is that the three countries have a tradition of a high proportion of family businesses, which began to internationalize in the 19th century.

According to Forster, these German SMEs have great potential for growth if they are relieved of the burden of a shortage of skilled workers, high taxes and bureaucracy. Of all the bad news about the German economy so far, this is probably the only prediction that can barely be considered good news.