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Economy: Who is afraid of this number?

1. Is there a recession now?

It looks as if Germany has just barely missed it. Economists speak of one recessionif the economic performance of a country declines for two quarters in a row. In the third quarter of last year, German gross domestic product (GDP) has actually shrunk. Although official data for the fourth quarter will not be released until February, after all that has been known so far, the economy has not shrunk any further. This would not meet the technical requirements for a recession.

An entirely different question is what follows. The growth rate in a quarter does not in itself say much about the economic situation in a country. Unemployment, for example, tends to increase when economic performance only increases slightly over a longer period of time, even if it does not decline immediately. Conversely, it has little impact on the labor market if GDP shrinks for a few months but then increases again.

Most economists are currently thinking of the latter scenario. It is important to note that the economy has lost some of its strength recently, mainly because of a special effect: in autumn, a new road test for cars was introduced, and some of the major automakers have cut production as part of the change. According to estimates by the Kiel Institute for the World Economy, this alone dampened the growth rate in the third quarter by about 0.3 percentage points. This means that manufacturers will try to make up for production losses in the coming months – which would then translate into correspondingly higher growth rates. And: The drought of the summer months has heavily affected shipping traffic on the Rhine, which is why the large number of chemical companies located there could not transport their goods as usual. Some of them even had to temporarily stop the tapes. These failures can also be caught up.

In addition: There is also positive news. Never before have so many people been gainfully employed in Germany as at present. Employment reached a new high of 44.8 million people. Because wages are also rising, most people have more money available. And they also spend it. Last year, private consumption increased by 2.6 percent. That supported the economy, say those who believe it will not be that bad. After all, Germany has behind it one of the longest upswing phases of the post-war period, since it is only natural that the economy should weaken a little now.

However, there are now more and more experts who do not share this assessment. After all, the economic momentum in the US and China is slowing down, two important export markets for German companies. And things do not look much better within Europe: the unrest in France is weighing on the economic climate there, in Italy there may be a new financial crisis, and the looming Brexit is putting a strain on business relations with the British.

In the past year, exports have increased only half as much as in the previous year. Foreign trade, a long-running engine of the German economy, currently has only few impulses for the economy. Overall, the economy grew by just 1.5 percent in 2018 – the lowest level in five years, a decline of 0.7 percentage points compared to 2017. If global trade disputes escalate, it could well go lower this year.

Conclusion: It is by no means certain that the economic upswing, which has been going on for almost ten years, will be a real economic downturn with job cuts, tax defaults and a downturn in business sentiment – but for the first time in a long while it is no longer completely unlikely.


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2. What role does the auto industry play?

A very central. The historically long upturn is mainly due to the fact that the carmaker – by far the most important industry in Germany – have earned a lot despite various emissions scandals and hired more people. The sales records at BMW, Daimler and Volkswagen also benefited major suppliers such as ZF, Continental and Bosch. The news weighed all the more that Bosch is reducing 600 jobs in drive technology because of the diesel crisis. At the end of last week Ford also announced job cuts in Europe, previously General Motors had already announced an austerity program.

The Germans are not that pessimistic. The Association of the Automotive Industry (VDA) spoke of a pleasing annual balance in 2018. Around 3.4 million cars were registered in Germany alone – despite the problems with the new exhaust technology. For federation president Bernhard Mattes the German car market is "very robust". For the current year, "the signs continue to stand for growth". One reason: The manufacturers are introducing a large number of new models and have better control of the stricter emissions controls from month to month.

And yet the industry is changing enormously. So VW and other manufacturers have to meet the threat of diesel driving restrictions changed customer behavior and invest many billions in the construction of an electric fleet. The race for the electric cars, the German manufacturers have not lost. For this year, Porsche and Audi have announced the first pure electric vehicles that can compete with the flagship model S of the American manufacturer Tesla. Next year VW will follow suit with the ID in the compact class. This should also conquer the US market.

Nevertheless, all this is a "huge challenge", as formulated by Volkswagen Group Works Council Chairman Bernd Osterloh. While, for example, just a few years ago, 50 percent of vehicles from Wolfsburg had a diesel engine, today only 15 percent of customers order a diesel. This trend reversal is so difficult to cope with suddenly, because the suppliers have to produce completely different parts for gasoline engines than for diesel.

Dangerous could be something else for the big German manufacturers. China is increasingly suffering from the trade conflict with the US. With 22 million new car sales, Center Automotive Research expects to spend around two million less this year than two years ago. At the same time, factory capacity has grown enormously, with manufacturers offering discounts trying to get rid of their cars. A recession in China would thus also be felt in Wolfsburg, Stuttgart and Dingolfing.


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3. What is the government planning?

The government does not exist in this case, because Union and SPD draw different consequences from the lower growth rates. From the Union's point of view, the coalition should react to the weaker economy with comprehensive tax relief. Specifically, leading Union politicians, including Minister of Economic Affairs Peter Altmaier, demand that the solidarity surcharge be completely abolished during this legislative period. Background: In the coalition agreement it was agreed to abolish the special tax, among other things, to finance German unity only for the lower 90 percent of taxpayers, top earners must therefore continue to pay him. The argument of the followers of such an approach: If the state lowers taxes, citizens can spend more money, which supports the economy. And because in Germany, a whole range of smaller companies – so-called partnerships – have to pay the solidarity surcharge, these would also be relieved and could invest more.

The SPD, on the other hand, insists that the coalition agreement be adhered to. Federal Finance Minister Olaf Scholz, for example, does not believe that tax relief for top earners will help the economy. He argues that high-income workers save a large part of their earnings, which is why they do not spend more money when the state cuts taxes. In the SPD, it is more likely to increase public investment in the event of a downturn or to accommodate companies through cheaper tax-deductible options. Above all, the Social Democrats say that it is still too early for a discussion on possible measures to support the economy. So it is not clear at all whether the downturn is really coming.

In the debate party-political considerations, however, play at least as important a role as economic ones. For both coalition partners the changed economic situation is a chance to make a name for themselves. In the Union, the new CDU leader, Annegret Kramp-Karrenbauer, has to make sure that she keeps the supporters of her rival Friedrich Merz, who has been defeated in the elections to the Executive Committee, in good spirits. Merz wanted to score with a more liberal economic focus and had spoken out for a complete abolition of the solidarity surcharge, which was very well received, especially in business-related party circles. The affirmation of this demand, which has been boosted by economic policy, thus also serves to safeguard the peace within the Union.

In the SPD, on the other hand, it is believed that an increase in public investment among Social Democratic camp voters is more important than tax cuts for top earners. And you do not want to let the topic take away from the Union. After all, as Federal Minister of Labor, Scholz was one of the architects of the stimulus package with which the grand coalition responded to the severe recession due to the financial crisis almost exactly ten years ago. Under his leadership, among other things, the short-time allowance was extended, which today is considered an important contribution to overcoming the crisis.


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4. Does the state have money to spend?

No. The federal government alone generated a budget surplus of 11.2 billion euros last year alone. The money is already completely planned. Among other things, the government intends to increase spending on defense and development aid in the coming years, to promote research and development in companies and to stimulate the production of battery cells with public funds. That should consume the surpluses.

In the past few years, special requests could generally still be financed, because the federal government always took more taxes than initially estimated due to the good economy. But if economic output weakens, it will not be. At the end of January, the government should correct its own growth forecast – which is the basis for estimating tax revenues – significantly downwards. Maybe not in the end is more, but even less money than planned. In a statement drawn up by the Union faction in the Bundestag statement of the most important budget items is even already threatened by "financing gaps" in the budget.

This means that additional expenditures not planned in the budget, such as a complete abolition of the solidarity surcharge, or even new investments in the current environment are likely to be possible only if the coalition repeals expenditure elsewhere. After all, it would cost annually about ten billion euros in addition, to free even the top earners from solos. However, the government is not ready to counter-finance spending cuts. Alternatively, it could create new debt, but that would mean abandoning the goal of a balanced state budget for the first time in five years. For the Union, that would be difficult to convey politically. After all, the CDU and CSU see themselves as guarantors of sound public finances.

And even if the CDU chief Annegret Kramp-Karrenbauer would enforce a change of course at this point: The debt brake in the Basic Law is designed so that it sets the public borrowing in good times narrow limits. The idea: When the economy grows, it does not need a government boost. Specifically, the federal government is currently expected to lend less than three billion euros a year, according to government estimates. Only if the gross domestic product sank significantly, higher loan amounts would be possible. For that reason alone, it is unlikely that the state will spend much on the economy – unless the downturn really does happen.


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