Germany’s economy looks like it could expand, but don’t bet big on it. A rise in energy costs could easily torpedo any manufacturing rebound in a trice.
Here’s what we know now.
First, the German government revised its 2024 GDP growth forecast to 0.3% up from the previous projection of 0.2%, according to a recent report from Deutsche Welle.
In addition, the country’s service sector, which accounts for approximately 70% of GDP is now in expansionary mode. The HCOB Germany Services index jumped to 53 in April up from 50.6 in the previous month, according to data from Trading Economics.
Readings greater than 50 indicate expansion and that means the bulk of the German economy is growing. That’s quite a different situation compared to the five months through February which saw back-to-back contraction.
And that probably ends the good news for Germany.
Manufacturing remains weak. For the last year there were 12 months of back-to-back contraction. That weakness is at least in part due to the impact of the Ukraine war on energy prices.
Like much of Europe, which has been hostage to Russian energy for much of the last decade, inflation remains a major problem. February and March this year both saw readings of 0.4% inflation. Make no mistake that’s a huge inflation rate on monthly basis.
The inflation could go even higher if energy prices surge again. One clear possibility is the war in the Middle East spreads and interrupts oil supply from a region that provides approximately 40% of global energy.
If that did happen, inflation would increase and hurt German consumers ability to spend, and would also influence the country’s service sector.
The received wisdom that energy price movements are transitory and therefore can be excluded from inflation figures, the reality is quite different. David Ranson, a veteran financial analytics wizard and expert at HCWE, has analyzed inflationary patterns and notes that when energy prices jump substantially then the core inflation rate – which excludes food and energy prices — also tends to rise also. In other words there’s no getting away from the inflationary power of energy shocks.
There are related worries. The relatively high inflation in Germany may lead the European Central Bank (Europe’s equivalent to the Federal Reserve) to flip flop on its plan to cut rates later this year. High rates, staying high for longer than expected, which no doubt cut into Germany potential economic growth. Put simply, Europe’s largest economy could easily remain in what can only be called the doldrums.
What else could hurt Germany’s economy? A war on its borders wouldn’t help. Productive output would need to be shifted to manufacturing war materiel such as tanks, rockets, warplanes and bullets. Plus many workers would likely get conscripted thus presenting businesses with a labor shortage.
Other possible problems include a future blockade of the Red Sea. While the Iranian-backed Houthi rebels have scared away many commercial shippers, the matter could get worse in the future. All out war in the Middle East could easily shut down this key trade route entirely.
The short answer to the issue is that Germany’s economy might be coming out of a huge economic mess, but it remains on a knife edge as to wether that will last the year.
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