Germany has come a long way in 100 years. Back in November 1923, people were trundling wheelbarrows stacked high with cash through its streets to buy a loaf of bread. Now its reputation is that of an economic powerhouse.
That episode of hyperinflation left deep scars on the nation’s psyche. Government printing presses were working flat out to produce mountains of worthless bank notes and the currency collapse was so severe a single US dollar was worth 1tn marks. “Never again” has been the mantra ever since.
Germany’s rebound from the triple shocks of the first half of the 20th century – the collapse of the currency in 1923, the Great Depression and defeat in the second world war – was remarkable. So spectacular was the recovery in the 1950s and 60s that a word was coined to describe it: Wirtschaftswunder – or economic miracle.
That economic miracle is now in trouble. Nowhere near as much as it was 100 years ago, but the war in Ukraine, slower growth in China and the retreat from globalisation have taken a toll. Germany has deeper problems too: an ageing population and an industrial model showing its age.
Evidence that Germany might just be an analogue economy struggling to make the transition to a digital age comes from the latest manufacturing data. Industrial production has fallen for five straight months and is more than 7% below its pre-pandemic levels. The International Monetary Fund expects Germany to be the weakest economy in the G7 group of leading rich nations this year, and the only one to see output fall.
Carsten Brzeski, the global head of macro at ING bank, says Germany’s problems were a mixture of the cyclical and the structural. “How much is down to each? It is impossible to disentangle but it’s both.”
After shrinking this year between July and September there was a good chance, according to Brzeski, of a similarly weak performance in the final three months of 2023. Those two consecutive quarters of contraction would leave the economy in a technical recession.
Germany has managed to find alternative sources of energy to make up for the loss of Russian gas from the Ukraine war but it has been more expensive. Energy-intensive sectors such as chemicals have been particularly hard hit.
There have been other adverse shocks. Germany’s strong export performance in the years running up to the pandemic was in part due to strong demand from China, which has now moderated. Meanwhile, its motor industry is being attacked on two fronts – from cheap Chinese electric cars, and from the incentives provided by Joe Biden’s Inflation Reduction Act for low-carbon manufacturing to migrate to the US.
“The biggest issue was that companies did not see the need to change when times were good,” Brzeski says. “That showed a lack of foresight. The good times were going to come to an end and companies should have acted pre-emptively.”
David Marsh, the chair of the thinktank OMFIF, agrees that Germany’s problems are more than temporary: “Something structural is going on there. Many times in the past people have called time on the German economy and the German economy has always bounced back. This time it might be slightly different.”
Marsh says that after Angela Merkel committed to shutting down all of Germany’s nuclear power stations in 2011 months after the Fukushima disaster in Japan, the country became over-reliant on cheap Russian gas to meet its energy needs. “They put all their eggs in the Russian basket,” he says.
Moreover, Germany’s struggles had come at a time when other eurozone countries were becoming more efficient. Marsh suggests that if Germany still had its own currency it would be falling due to the need to regain competitiveness.
“I am surprised. I thought they would have done better. There has been a failure to digitalise the economy in many ways.”
The Bundesbank, Germany’s central bank, became a symbol of the country’s postwar success. Fiercely independent, it saw its role as ensuring there would be no return to the dark days of 1923, when a postage stamp cost as much as a villa had done a few years earlier. Money in circulation, which stood at 120bn marks in 1921, reached 2,500,000,000,000,000,000 marks in October 1923 and 400,000,000,000,000,000,000 marks the following month.
Since the creation of the European Central Bank a quarter of a century ago, the Bundesbank no longer sets German interest rates or has responsibility for price stability, but its president, Joachim Nagel, remains an influential figure at home and abroad.
Speaking in London this week, Nagel admitted it was a mistake for Germany to be so dependent on Russian gas, but expressed optimism about the economy’s ability to bounce back. He said: “Some people say Germany is the sick man of Europe. I don’t believe this is the case.”
As a large open economy exposed to problems in global supply chains and the slowdown in China, the current weakness had come as “no surprise” to the Bundesbank, he said. “But we are not looking at a hard landing,” Nagel said. “There is strong turnaround potential.” Businesses would rise to the challenge as they had in the past.
Brzeski said the success of reunification showed Germany could get out of tricky situations, but it wouldn’t be easy.
“It’s not just energy. It is changing global supply chains. It is the role of China. It is demographics and an ageing population. I wouldn’t underestimate the willingness of German companies to adapt and survive, but it’s going to be a long and difficult process.”
