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Economics Update May 2023 - German economy: double dip increasingly likely

Bad Homburg, 5/8/2023
by Axel D. Angermann
  • Massive loss of purchasing power weakens private consumption
  • Downturn in construction industry will accelerate
  • Hardly any positive impetus for exports
  • Negative economic trend emerging at end of year

Germany's economy has come through the winter better than originally expected, but a self-sustaining upturn is not in sight for the time being. There are a number of reasons why it is more likely that there will be a renewed economic downturn after a brief interim recovery.

Government price brakes fizzle out

The price caps for electricity and gas are only effective in the short term. In the long term, they cannot prevent massive losses of purchasing power. Energy prices - especially for natural gas - are expected to rise again in the course of the year because Germany will have to purchase additional gas on the world market to compensate for previous supplies from Russia, while global supply will remain stable. Private households are increasingly unable to absorb rising energy costs from existing reserves, as the savings rate has already fallen below the long-term average and German households' demand deposits with banks are also noticeably below the level seen before the start of the Corona pandemic. Against this background, private consumption is expected to remain weak.

Restrictive monetary policy taking effect

The ECB's tightening of monetary policy is now also having a visible impact on lending: Stagnation in corporate lending and slowing growth in mortgage lending have led to a fall in investment activity overall. Construction investment has already been declining since the middle of 2022. It is to be feared that the downward trend will accelerate here: In addition to higher interest rates, significantly increased construction costs are leading to many construction projects being put on hold and new ones not even being started. The result will be a noticeable slump in construction output.

Hardly any impetus from China

The industry is benefiting from high order backlogs and is able to work through them in the face of significantly reduced supply disruptions. However, considerable uncertainties remain, particularly in the energy-intensive industries, which must fear for their global competitiveness. China is also likely to fail to provide impetus for German industry because the bulk of the Chinese economic recovery will take place at home, where it will benefit service sectors in particular. A boom in exports to China is therefore not to be expected.

Taken together, these factors mean that the momentum of overall economic development in the coming quarters is likely to be positive, but overall only slightly above the zero line. Overall economic output at the end of 2023 is still likely to be at the level of the third quarter of 2022.

US recession as an additional burden

A further deterioration would result from a recession in the US economy, which is already becoming apparent in the second half of the year as a result of the restrictive monetary policy of the US Federal Reserve. The USA remains Germany's largest trading partner. If a US recession hits an already struggling German economy, there is a risk of a relapse into negative economic development at the turn of 2023/24 - a classic double-dip development. Only in the course of 2024 could growth pick up noticeably. For 2024 as a whole, GDP growth is therefore expected to be very weak again, at around 0.4 percent.

About Axel D. Angermann

As Chief Economist of the FERI Group, Axel D. Angermann analyzes the economic, monetary policy and structural developments of all markets that are important for asset allocation. His analyses form the basis for the strategic orientation of FERI's multi-asset strategy, for which the CIO of the FERI Group, Dr. Marcel V. Lähn, is responsible. Angermann himself has been responsible for FERI's analyses and forecasts for the overall economy and the international financial markets since 2008. He joined the company in 2002 as a macro analyst. His professional career began at the Max Planck Institute for Economics and the German Chemical Industry Association. Angermann studied economics in Berlin and Bayreuth.

About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently manage assets of about EUR 54 billion in the Group, including round about EUR 18 billion in alternative investments. The FERI Group is headquartered in Bad Homburg and has locations in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.

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Marcel Renné

Chairman of the Board & CEO

Rathausplatz 8-10

D-61348 Bad Homburg

Axel Angermann