Germanys economy has fallen into a perfect storm: manufacturing industry has suffered a serious setback

 Germanys economy has fallen into a perfect storm: manufacturing industry has suffered a serious setback

The perfect storm is a common term in financial markets. People will compare some potential economic crises with the big storm that the weather system failed to forecast in time in 1991, which triggered a heavy rainstorm in the northeast of the United States.

According to Bloomberg Business Weekly on October 8, the German economy is highly sensitive to fluctuations in the global economy. After nearly 10 years of uninterrupted expansion, the German economy is on the verge of recession.

Since the second half of 2018, the German economy has been shrinking, and this situation has not been reversed in 2019. German GDP fell by 0.1% in the second quarter of 2019, according to data released by the Federal Bureau of Statistics. This is another contraction in Germanys economy after the recession of 0.1% in the third quarter of 2018 and zero growth in the fourth quarter. The German Kiel Institute of World Economics and Leibniz Institute of Economics released reports on September 11 that the German economy is likely to shrink again in the third quarter of this year. Thus, Germanys entry into a technological recession seems to have been nailed down.

In Germanys economic downturn, manufacturing has performed particularly poorly. Germanys Mackitt Manufacturing Purchasing Managers Index (PMI) in September hit its worst performance since the financial crisis of 2009, and has been below the boom and bust line for nine consecutive months.

Internal economy, as the heart of German manufacturing industry, the automobile industry is in crisis. The German automobile industry has been criticized worldwide for cheating on diesel emissions, which has led to a scandal of suspected monopoly by five major automotive companies. This country, which has been regarded as the dominant industrial trend in the world, has been wavering in its path choice. It is weak to deal with the challenge of pure electric vehicles and left behind by the United States represented by Tesla. In addition, the traditional German automobile industry has been greatly impacted by the leading position of technology companies from Silicon Valley in driverless and artificial intelligence.

Stuttgart-based Daimler Mercedes-Benz recently announced a loss of 1.6 billion euros in the second quarter of this year, compared with a profit of 2.6 billion euros in the same period last year, which shocked the automotive industry. In addition, affected by trade tensions and climate crisis, Frankfurt Motor Show, one of the largest auto shows in the world, ushered in the coldest session since its inception this year.

From the external point of view, the export-oriented German manufacturing industry has been greatly affected by the external international unstable economic situation. With the risk of Britains non-agreement to leave Europe increasing and trade frictions intensifying, the economic prospects of Germany, which relies on exports, remain uncertain. At the same time, the Trump government announced new tariffs on billions of dollars of EU products since October 18, bringing greater instability to Germanys export business.

Eric Schweitz, chairman of the German Chamber of Commerce and Industry, said that in the first half of 2019, Germanys exports grew zero, falling sharply compared with the same period in 2018 (an increase of 4%) and its trade surplus decreased by 13 billion euros.

Faced with domestic and foreign difficulties, five leading German research institutes dramatically downgraded their economic growth forecasts, predicting that the German economy will grow by 0.5% this year and 1.1% in 2020. By contrast, their April forecasts for the two indicators were 0.8% and 1.8%, respectively.

Black Zero Policy Is the Key

Chancellor Angela Merkel acknowledged that the German economy was in a difficult period and Minister of Economy Artemir believed that the right measures must be taken to reverse it.

As for how to boost the economy, the German Chancellor Angela Merkels government has been called upon to abandon the long-standing principle of avoiding large-scale fiscal expenditure, commonly known as the black zero fiscal policy aimed at balancing revenue and expenditure.

Recently, however, in the face of the downturn of the economy, criticism of the German government for not spending money has been growing. At present, the yield of German 10-year Treasury bonds has fallen to nearly - 0.65%, and the cost of government borrowing has dropped significantly. In August, the German Industrial Association (BDI) began calling on the federal government to abandon its harsh fiscal policy as soon as possible. Joachim Langer, general manager of the association, believes that Germany was conditioned to do this because the German economy has been strong in the past decade, with a high employment rate and a healthy public finances. But now, this policy must be re-examined in the context of a sluggish economy. Germany must now formulate a new fiscal policy.

Next years decision to stick to theblack zerobudget policy is absolutely not a dogma, said Ashim Lang, managing director of the BDI Industrial Alliance, adding that old ideas have no role to play in facing current economic challenges.

Although most domestic economists and the European Central Bank want the German authorities to open their wallets, balance the trade surplus, increase public expenditure and prevent the economy from falling into recession, it seems that the German authorities are not ready to implement a large-scale economic stimulus plan.

According to Deutsche Presse, German Economy Minister Peter Altmeir said that Germany has not yet experienced a serious economic recession in the real sense, and there is no economic crisis, so there is no need to abandon the black zero budget policy to avoid new debt (the federal budget is fully balanced). Im sticking to my position that its at the wrong time to argue about black zero, Altmeir said.

Germanys obsession with fiscal policy of balancing revenue and expenditure has a far-reaching historical origin. After the two world wars, in order to solve the debt problem, Germany has promulgated legal provisions prohibiting large-scale borrowing, emphasizing that in principle the amount of debt should not be more than the amount of long-term and generally pro-growth investment. After the debt crisis broke out in Europe and America in 2008, in the basic law, Germany once again stipulated the debt limit for the federal and federal states.

On October 2, German Finance Minister Schultz said that Germany, as Europes largest economy, would be able to cope with the economic crisis. He added that the economic downturn was not expected to be as serious as in 2008/09, and that the government would help businesses through tax cuts and contributions to the social security system.

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Source: Responsible Editor of Times Weekly: Liu Song_NBJ9949