Although it may not seem so, the German economy is performing significantly worse than the European average. Given that consumers' purchasing power continues to decline, Germany really has little reason for optimism in economic terms

Contrary to what the German authorities often emphasize, the German economy was hit hard by the pandemic. While European GDP in the third quarter of 2022 was 2.7 percent higher than before the pandemic, in France by 1.1 and in Italy by 1.8 percent, Germany only managed in that quarter to match GDP with that of the pre-pandemic period – much later than in almost all other European countries.

And while in the last quarter the entire eurozone managed to achieve some slight economic growth, the German economy again recorded a decline of 0.2 percent. The differences become even more visible when observing the whole of 2022. While German politicians celebrated annual growth of 1.8 percent, at the same time the eurozone economy as a whole grew by almost twice as much, 3.6 percent.

A technical recession is expected

As economic experts say, a better situation for Germany is not in sight anytime soon. If their projections for the first quarter of this year come true, according to which the German economy would fall again by 0.4 percent, that would mean only one thing – entering a technical recession. Since only slight growth can be expected after that, German GDP will probably not reach again the level it had in the summer of last year until the end of this year, and that would mean that the pre-pandemic level would not be reached either. In other words, Germany would then miss out on four years of economic growth.

In addition to all of the above, it is incredible that indicators of economic sentiment in Germany are simultaneously showing a positive trend. The German economic climate has, according to the Institute for Economic Research Ifo, improved for the fourth time in a row, ZEW's economic expectations for the country have been positive only since February 2022, and consumer sentiment has equaled that at the time of the outbreak of the war in Ukraine.

Construction workers speak of the biggest decline of all time

But the facts speak somewhat differently. Production fell by 3.1 percent in December compared with the previous month, which is significantly more than expected. Business collapsed especially in construction, where output fell by eight percent. Construction investors are even speaking of the steepest decline of all time. In addition, retail sales also fell in December. In the Christmas month, traders achieved sales 5.3 percent lower than in November, and compared with the same month in 2021, it fell by 6.4 percent.

Last year's record inflation of 7.9 percent caused real wages to fall by 4.1 percent compared with the year before. After a three-year consecutive decline, the real purchasing power of employees today is just as low as it was in 2014. So employees have seen no gain at all for a full eight years.

Given that the largest German companies had record profits, the financial consequences of the energy crisis have so far obviously been borne by employees, but also by the state itself.

Unions have risen up in Germany as well, and better working conditions for 11 million employees will be sought. But these are expected to be long and difficult negotiations. Employees in the federal and municipal public sector will seek a wage increase of 10.5 percent, postal workers by 15 percent, and railway workers by 12 percent. The authorities have so far rejected their demands, but the unions are responding with strikes.

The question is how much wage growth Germany could really bear. On the one hand, economic development is uncertain and largely depends on the development of the war in Ukraine and on movements in the energy market. On the other hand, it seems that world trade, led by China, is visibly recovering from the consequences of the pandemic and the war. In the past, German industry, which is a strong exporter, has always been one of the biggest beneficiaries of improvements in the global economy.

Nevertheless, the German economy is heavily affected by the decline in real wages. Germans will become aware of this at the latest when all state injections have been paid out and spent and no new aid packages follow. In the current year alone, the actual decline in purchasing power will probably amount to a high 100 billion euros.

Source: tportal.hr