German economy dangerously unbalanced and may topple fragile chancellor
THEY have made a tepid early exit from the World Cup. The government is split over Europe and close to collapse. The country is struggling to cope with a heatwave. It sounds like a typical English summer. Except this is Germany we are talking about, not the UK.
Angela Merkel may or may not have patched together a deal on immigration that will keep her fragile coalition together for a few more months. The trouble is, migration is not her real problem – it’s the economy.
The numbers coming out of what is meant to be the powerhouse of the eurozone over the last few weeks have been terrible. On Friday, we learnt that retail sales are in freefall, and this week is likely to produce more bad news on industrial production. In fact, Germany is only a whisker away from an outright recession. Over the last decade, Merkel has created a dangerously unbalanced economic model based on massive trade surpluses and cheap labour. If that comes unstuck, it will be her downfall.
At an EU summit, she just about managed to stitch together a deal to allow migrants to be moved around Europe, although whether that actually sticks remains to be seen.
Even so, it was not enough to satisfy Horst Seehofer, the pugnacious leader of Bavaria’s Christian Social Union, who promptly threatened to resign as interior minister. Merkel needs the support of the CSU to stay in office, and will have to work out a compromise. The chances are that some kind of deal will be struck at the last minute.
To most mainstream commentators, the German economy is still the smooth, powerful locomotive of the eurozone, its industrial giants dominating global export markets, creating jobs and racking up vast profits. That isn’t evident in the figures, though. They keep on getting worse and worse.
It is virtually impossible for an economy to expand when sales in the shops are plummeting by 0.5pc or more in six of the last 12 months.
Industrial production is not much better. In April, factory output was down by 1pc month on month, and has now been falling for four consecutive months. The figures for May will be published this week and High Frequency Economics is forecasting another monthon-month fall.
It looks increasingly likely that the German economy will contract this quarter, and if that keeps up over the summer it will be in recession.
True, employment keeps rising but very few of the new jobs go to Germans.
HFE estimates that 354,000 immigrants, mostly from central Europe, found jobs inGermanyinthelast12 months, pushing employment total up even while the number of jobless Germans remained broadly static.
And Germany also faces some serious longer-term challenges.
President Trump’s trade wars look likely to pose an acute challenge to its once mighty auto industry, at precisely the same time as it is challenged by diesel scandals and the switch to electric and driverless cars.
Other major industries such as steel, machine tools and aircraft may well be caught up in the trade crossfire next.
If Europe slows down, Germany will slow down with it. Its banking system looks the wobbliest in the world right now, with the once mighty Deutsche Bank hitting fresh lows every week. If it needs a bailout, the consequences will be cataclysmic. Meanwhile, Germany’s surpluses have left it uniquely exposed to a crash.
Over13yearsinpower, Merkel has presided over one of the most dangerously unbalanced economic models in the world.
It has worked up to now, but it may well fall apart at any moment, and possibly spectacularly so. At the very least, a sharp slowdown now looks inevitable. Migration might be the row this week. But it is a downturn in the German economy that will finally topple Merkel – and that is not far away. (© Daily Telegraph, London)