After nine consecutive years of growth, it is projected that the German economy will experience a technical recession in the third quarter. Although the German Ministry of Economic Affairs said that it is not expected to have a more serious economic slowdown or a significant economic recession, Germany's major economic institutions have significantly lowered the country's growth rate to be 0.5% and 1.1% this year and 2020 respectively.
Germany is one of the most developed countries in the world. Its high-quality manufacturing industry is globally renowned, and its products are often exported to the international market. Why then is Germany facing the risk of economic recession? With global central banks continuously cutting interest rates and the European Central Bank keeping interest rates low, why is the German economy not benefited by this and still depressed? Some analysts believe that the German economy seems to be caught in a "black hole economy". Despite low interest rates and sufficient funds, it would still be difficult to stimulate German economic growth. It appears that all economic resources are swallowed up by a "black hole."
On the surface, the gradually deepening predicament of the manufacturing industry appears to be an important reason. The German Ministry of Economic Affairs said that export-oriented German industries are facing a situation of weak global trade, global manufacturing stagnation and declining demand for automobiles. Economists worry that the slowdown in manufacturing will sooner or later spread to the industries of Europe's other large economies, and the German labor market has begun to feel the impact of the economic slowdown.
The shadow of the economic slowdown is sweeping across the entire German manufacturing industry. Daimler and BMW recently announced a reduction in costs. Bosch and Continental, the world's first and fourth largest auto parts suppliers, have announced layoffs. Combustion engine manufacturer Mahle has shut down a local factory while Schuler, the manufacturer of frame components, has decided to move their production line overseas.
From October 2018, there is now direct connection for freight trains from Mannheim in Germany to Chongqing in China. Even so, before the manufacturers of Mannheim could benefit from that, they are now being affected by the U.S.-China trade war. BASF, the world's largest chemical manufacturer, has its base here in Mannheim. BASF originally expected a profit of up to 10% this year, but instead has announced a cut in their financial forecast. In the worst-case scenario, the profit could decline 30% compared with the previous year, and it is planned that at the end of 2021, 6,000 employees globally will be laid off. According to the German Federal Statistical Office, the number of reduced pay workers has increased by about 50,000 in August, four times that of the same period last year. Revenues have decreased and consumption has also decreased. According to official figures, Germany's retail sales in June still increased by 3% from May, but the July figure turned negative growth by 2.2%.
The strong German manufacturing industry is now facing difficulties, and the analysis given by ANBOUND is that such a phenomenon is related to the current era of overproduction. In such an era, the stronger the manufacturing industry and the larger the proportion of the manufacturing economy, the greater the impact on the economy will be. The trade war initiated by the United States has added troubles to the German manufacturing industry, which is highly dependent on exports. The proportion of German manufacturing in GDP is the highest among developed countries. The top ten export products, from automobiles and machinery to aerospace and aircraft, are all dominated by the German manufacturing industry. However, the manufacturing industry is a double-edged sword. It is Germany's strength, and at the same time also the reason for the current difficulties the country faces. In the past, Germany mainly relied on exports to Europe, but Europe has not recovered from the debt crisis. The economic growth rate of the euro zone has been less than 2% in 3 out of past 5 years and dropped to 0.2% in the second quarter of this year. The European economy is in a downturn, and German exports are weak. The average annual growth rate of exports from 2012 to 2017 was only 0.2%. Dieter Kempf, President of BDI (Federation of German Industries), said that if a hard Brexit happens, Germany's economic growth rate will drop to zero this year.
Germany's industry has long been dominated by the manufacturing sector, with other sectors having little to contribute. When manufacturing exports fell, other sectors were unable to rescue. A business survey by the German think tank Ifo published in August stated that "not a single ray of light was to be seen in any of Germany's key industries". To the outside world, Germany is an advanced country but the word "advanced" does not seem to be able to describe certain fields such as digitization. In the European Union's Digital Economy and Society Index (DESI), among the 28 EU countries, Germany does not even rank in the top ten, which is even lower than the smaller southern European nation of Malta. The KfW Group's 2018 report stated that the biggest challenge for German companies is insufficient IT capacity.
The low level of digitization also reflects the lack of competitiveness of the German service industry. The service sector accounts for more than 60% of Germany's GDP, but according to the Organization for Economic Co-operation and Development (OECD)'s Services Trade Restrictiveness Index (STRI), in all 22 comparison projects, Germany scored below the average. One of the reasons for the inefficiency of the service industry is the heavy control. Clemens Fuest, President of the Ifo Institute for Economic Research in Germany, believes that the German service industry is not developing well because it is over-regulated; if the regulation is loosened and the foreign competitors are opened, it will help the service industry. Currently, many service industries in Germany have yet to develop their full potential.
In the view of the ANBOUND research team, the cause of the German dilemma is related to the development of the global economy into a new era, that of the buyers' world. As ANBOUND pointed out in the past, in the buyers' world, what is the most valuable is not the cheap and diverse commodities, but the economic aggregate and purchasing power. The determining power lies in the total strength of consumption, which is also embodied by the market space owned by a country. The formation of the buyers' world is related to overproduction. The advancement of science and technology, the division of labor in a globalized world, the entry of a large number of cheap laborers from developing countries into the market, the arrival of an information society, and the emergence and development of internet commerce have made overproduction extremely prone to happen. To a certain extent, it is the development of globalization that has created the current world of overproduction.
When there is a huge surplus in production, countries with market space have unique competitiveness. In contrast, the major manufacturing countries that used to play a leading role in the era of shortages are now in a passive situation. If a large number of surplus products cannot "realize" the value in the market, then what is the use of such production and production capacity? Excess production lines, accumulated inventory, idle factory buildings, inflated debt, potential financial risks, large amounts of energy consumed, and polluted environments will then emerge. In short, the production capacity that is not "realized" in the market is without value. If such manufacturing capabilities are unfortunately still in the relatively low-end value chain, they are more likely to be eliminated. Over the years, ANBOUND has repeatedly emphasized the "Chinese market", pointing out that China has the market space with buyers' world values other than being a "world factory". Manufacturing countries that lack the domestic market space will inevitably be seriously impacted in the market space competition and trade war.
Final analysis conclusion:
In the buyers' world, overproduction is often a common problem often present in manufacturing countries. It tends to form different levels of "black hole economy" and engulfs the vitality of economic development.
