The economy benefits from bad entrepreneurs

Bad economy, good job market : How the German economy is really doing

Rainer Hunsdörfer currently does not have an easy job. His company sells printing machines. This makes him one of the first to notice when the German economy is weakening. The reason: His machines are extremely expensive. If companies are even concerned about the economic downturn, they hold back on buying machines. And that is exactly what they are doing right now.

Orders from German mechanical engineering companies fell by nine percent overall in the first quarter, as the latest figures from Monday showed. Hunsdörfer feels this clearly in his company, Heidelberger Druckmaschinen AG. At the AGM recently he said: “We are currently experiencing a solid industry recession.” And there it is, the R-word: Recession. Time to assess how the German economy is really doing.

Which industries are struggling?

So far it is mainly the industry that is weak. In addition to machine builders, it also includes car manufacturers and chemical producers. All three are considered key industries: they shape the country's economy. And all three are reporting worrying numbers. For example, automakers can sell fewer and fewer cars in all of the world's major regions, whether in Europe, America or Asia. Like the German economy, they are heavily dependent on exports.

What was an advantage in the boom is now becoming a problem. Because there are several construction sites in foreign trade. There is the trade dispute: Both the Europeans and the Chinese are arguing with US President Donald Trump about cooperation and suffer from the fact that he is constantly issuing new punitive tariffs. And as if that weren't enough, the auto industry is also facing a huge transformation. It has to manage the change away from the internal combustion engine towards electromobility or hydrogen propulsion. But that costs. The car manufacturer Daimler alone has already issued three profit warnings this year due to this situation.

But the automotive industry is so important in Germany that its crisis quickly infects others. In addition to the machine builders, this affects the chemical industry. One example is the lubricant manufacturer Fuchs Petrolub. The company supplies the automotive industry with oils for engines, transmissions and shock absorbers - and is feeling the fall in demand. The company has therefore already issued a profit warning. And it does not assume that the situation will improve this year: "From today's perspective, the expected recovery in the global economy, but especially in the automotive industry, is not foreseeable in the second half of the year."

What are the consequences?

Most Germans have so far felt little of this development in their everyday lives. That also has to do with the fact that other industries are still doing very well. The real estate sector, for example, is booming. This, in turn, benefits the tradespeople who have so many orders that their customers sometimes have to wait a long time before it is their turn.

But the picture is slowly changing. This shows, for example, the development in retail, which also did well for a long time. But now the consumer climate has fallen for the third month in a row. The Germans put purchases on hold that they don't urgently need. Consumers are reacting to the news that the economy is deteriorating. Because economic development has a lot to do with psychology. Just the fear that the economy will weaken can lead to it actually doing it in the end.

What is the job market like?

The weak figures from industry are not yet having an impact on the labor market. The Federal Employment Agency just reported the lowest unemployment rate it has measured since reunification in July.

However, one has to know that the labor market reacts with a delay to poor economic data. The reason: Companies are hesitant to lay off. If the economy takes off again, they lack the workforce and it takes time to find and hire new ones.

That is why many companies are initially relying on other instruments. For example, many people in the industry are currently cutting their time accounts: employees who have accumulated overtime are being asked to take it. Some companies have also applied for short-time working. In doing so, they reduce the employees' working hours - they receive part of the lost wages from the state.

At the same time, however, one also has to say: Compared to the previous year, the cases of short-time working have doubled - but compared to the financial crisis, that is still little. While every 20th employee in Germany was affected by short-time work at the time, so far it is only every thousandth.

What's next?

When economists want to know what the future holds, they like to look at the Ifo index. To calculate this, the researchers survey 9,000 companies from industry, the service sector, construction and trade every month. You ask them to describe their current situation as well as their expectations for the future. From the answers, the economists then calculate a number, the Ifo index. It has recently fallen four times in a row and is now lower than it has been in six years. Thomas Gitzel, chief economist at VP Bank, therefore says: “The Ifo index prepares the German economy for a recession.” And there it is again, the R-word.

Economists always speak of a recession when the economy shrinks for at least two quarters in a row. So far, Germany has missed this. But economists are unsure whether it will stay that way. The German Institute for Economic Research (DIW), for example, only expects stagnation in the second quarter and even declining growth in the third quarter. In the meantime, one can no longer speak of a dip in the economy, say the economists of the banks. The German economy is going through a "persistent phase of weakness".

How do the stock exchanges react?

The stock markets trade the future. And at the moment, traders and investors are anything but rosy. It is a hodgepodge of bad news that sends the share prices and the German share index Dax downhill. In a row, companies cut their forecasts as well as industry associations. Above all, however, hovers the unpredictability of the current US president and his daily tweets.

But uncertainty is poison for the financial markets. It is underpinned by the central banks: the US Federal Reserve cut interest rates for the first time since the financial crisis, the European Central Bank has indicated further easing. The German share index Dax fell sharply on Monday and fell to its lowest level since the beginning of June.

What do big investors do?

Pension funds, insurance companies and funds are becoming more cautious. This is particularly evident in the continuing decline in government bond yields. It indicates a significant increase in demand. The yield on ten-year Bunds slipped to a new record low of minus 0.52 percent on Monday. On Friday even the yield on 30-year Bunds fell just below zero for the first time. This development is confirmed by a new survey by the major US bank Bank of America Merrill Lynch. After that, large investors increasingly rely on bonds and cash, and keep money in current accounts.

According to other experts, investors have been moving investment funds to safe havens for weeks. In the asset management of Deutsche Bank, the share quota was reportedly reduced from 50 to 40 percent, other fund managers are increasing the share of their cash reserves significantly - from an average of five to 15 percent in some cases. Investors even accept losses. Anyone who is currently betting on government bonds is putting on it because of the negative yield. Instead of collecting interest, he has to pay interest. To the delight of the finance minister.

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