Night shot of BASF in Ludwigshafen with the Rhine in the foreground Picture Alliance
Is the recession really just “mild?” After all, the German economy is shrinking like nowhere else in Europe – and this despite the fact that the population is growing rapidly.
Per capita economic output and thus income is falling even more.
New figures make it clear: Germany is currently losing more prosperity than pure economic growth shows. Rethinking immigration can help to boost growth.
Germany is in a recession – and yet seems almost relieved. The wording “mild” has prevailed for the recession. Ok, economic output has been declining for half a year. But what is minus 0.3 or 0.5 percent per quarter compared to the gloomy forecasts after Russia’s attack on Ukraine. If you have a job, inflation is more likely to annoy you. Anyone who owns a house ponders the heating law. And anyone who loses their job has a good chance of finding a new one, despite the recession. Employees are wanted.
This crisis doesn’t swing the axe, it rather instills a poison that is mild but scarcely less dangerous.
Germany has already been badly hit. The recession is not as mild as it seems. Germany has lost almost one percent of its gross domestic product in six months. That’s a good 40 billion euros. “We are clearly at the bottom,” says Ifo economist Timo Wollmershäuser. Only Hungary performs similarly poorly. At the bottom, Germany is still struggling to get back to pre-corona levels.
The tricky thing is that the German economy is weakening while the population is growing significantly at the same time. Actually, additional workers and consumers should ensure more growth. But the opposite is the case. Also because Germany doesn’t let many people work at all.
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Die Number of inhabitants in Germany increased by 1.1 million to 84.4 million last year. That was an increase of 1.3 percent. The reason is immigration. moved in just a year 1.5 million more people to Germany when left the country. The reason for the record is the immigration of around one million people from Ukraine who seek protection from Russia’s war of aggression.
In order to keep per capita gross domestic product stable, economic output would have had to grow by 1.3 percent. Overall, the economy grew by 1.8 percent in 2022. However, this was mainly due to the strong growth at the beginning of the year – a catch-up effect after Corona before the war began.
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Secondly, the weak economy is not the real problem. Every recession passes. The Bundesbank is already expecting a slight plus for the second quarter. What is more dangerous is that hardly any economist believes Germany is capable of a strong recovery afterwards. Because Germany’s growth potential is dwindling. For decades, the potential of the economy grew by an average of 1.3 percent a year. In a short time, this important value has halved to 0.6 percent. Diagnosis of tuberculosis.
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It currently looks different. In the first quarter of 2023, GDP in Germany was 0.5 percent lower than a year ago. At the same time, the population increased significantly. Calculated per capita, the gross domestic product shrank by 2.0 percent. Such a decline can hardly be described as “mild”. In the two winter quarters, GDP per capita fell by 0.7 percent on the previous quarter.
Economic output per capita is a good measure of a country’s prosperity. Germany has become poorer.
There are several reasons for this.
The reasons for Germany’s economic crisis
First: Germany is an export country. A large part of our income comes from Germany selling more goods abroad than it buys there. That is why the ratio of export prices to import prices is important – the so-called terms of trade. As energy became drastically more expensive, the exchange ratio deteriorated. To pay the high energy bill, Germany had to sell more other goods. The terms of trade have now normalized. But the export model has suffered damage.
Secondly: Productivity drops. In the first quarter, 45.6 million people were employed in Germany. That was never before and 446,000 people or 1.0 percent more than a year ago. The number of hours worked also increased by 0.9 percent. It just turned out to be less. Calculated per person in employment or per hour worked, economic output fell more sharply than the mild recession figures would suggest.
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Declining productivity can be due to companies retaining their employees even when they are not operating at full capacity. But it can also be a sign of a lag in technology, methods, or even the skills or motivation of employees.
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Why are so many immigrants not allowed to work?
Third: Germany does not use immigration. Many refugees or asylum seekers are not allowed to work. So they cannot contribute to GDP. The situation of the Ukrainians is different. They are allowed to work in Germany because of their status. Of the one million who came to Germany, around two thirds are of working age, most of whom are women with children. Many prepare for a job in language courses. Over 70,000 are already in permanent employment.
“We have become an immigration country. We have to realize that and find answers to the question of how we can get the people who have come to us into work,” says Andreas von der Gathen, head of management consultancy Simon-Kucher. Immigration represents a great opportunity for Germany if it succeeds in integrating immigrants into the labor market. The need is great. In total, companies are currently unable to fill 1.7 million vacancies.
Although the population is growing, there is a shortage of workers and skilled workers in almost all professions and sectors. This is another reason why the growth potential is shrinking. The reason is the aging of the population. Every year, hundreds of thousands more people from the baby boomer cohorts leave the workforce than join the younger cohorts.
In Germany, not only is the population growing, but also the proportion of pensioners who no longer actively contribute to GDP. The proportion of people over the age of 65 in Germany has risen from 10 percent in 1950 to 22 percent today. Ascending trend.
Getting more people into work and increasing work productivity again is the big challenge. Only then will the potential of the German economy grow again – and with it prosperity.
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Fourth: The industry is weak. In the past year, it was above all the energy-intensive sectors such as chemicals and metals that reduced their production. Now that energy prices have normalized, production in these industries remains weak.
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In order to strengthen growth, much more would have to be invested in new plants – the capital stock would have to grow. The employer-oriented Institute of the German Economy (IW) has calculated that in 2022 more money will flow out of Germany than ever before, at 125 billion euros. This means that companies from Germany have invested 135 billion euros in production abroad, while companies from abroad only invested 10 billion euros in Germany. “In the worst case, this is the beginning of deindustrialization,” warned the IW.
The current recession is more than a mild dip. She stands for a crisis. Its label is stagnation – and should inflation continue, so will stagflation: an economy without growth and rising prices. That costs prosperity, all the more so with a growing population. And it makes it more difficult to solve most of the challenges, from the necessary investments in education and a fair distribution of wealth to the restructuring of the economy to make it more sustainable and climate-friendly.
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“The beginning of de-industrialization”: Companies withdraw more money from Germany than ever before and invest abroad