The German economy is set to tip back into a technical recession in the first quarter of 2024, according to the Bundesbank. This means it will continue to shrink in the first three months of this year – after contracting last year and registering as the worst-performing major economy in the world.
A technical recession is ‘technical’ in the sense that it follows a pretty arbitrary rule of thumb used by economists to identify when an economy is in decline. It was once useful for indicating serious and shocking problems in an economy, but since western economies entered a period of deep stagnation at the turn of the decade it has simply become a hallmark of our new economic age.
Looking at the components of the German economy, there is no good news whatsoever. Consumption is either flat or going down. Investment is in decline. Both imports and exports are falling, but since imports are decreasing faster than exports this is propping up the GDP numbers. Until last October, the services sector was growing; now even this is in decline. Overall, the Germany economy appears to have nowhere to go but down. It hobbles along, waiting to die.
Surely our leaders have a plan? Sadly not
The underlying structural problem is one of crawling deindustrialisation. While energy prices have fallen from the peaks they saw in the summer of 2022, they remain elevated. The current spot price for German electricity is around €63/Mwh (£54/Mwh). This is almost double the average price seen before the disruptions of the lockdowns and then the gas sanctions and countersanctions associated with the war in Ukraine, culminating with the destruction of the Nordstream pipeline in September 2022.
Germany is known as the key manufacturing economy in Europe – a kind of economic crown jewel for the continent. But global manufacturing is a highly competitive game with remarkably thin margins, and energy prices are one of the key input costs. Without access to cheap Russian piped gas much of German manufacturing is uncompetitive. German industrial production has now fallen for seven straight months up to last December and shows no sign of turning around.
The crisis in Germany speaks to a broader crisis across Europe, including in Britain: there is no longer any economic plan. Until the war in Ukraine, the basic model of economic growth in Europe was one in which cheap energy from Russia was imported to build high-value goods that were then sent all over the world. Britain was on the sidelines, playing financier for this whole arrangement. Without access to the cheap energy inputs, Europe’s model is no longer viable.
Surely our leaders realised this and have alternative arrangements in mind? Sadly not. When the Russian gas first dried up there was some excitement about replacing this energy with Liquified Natural Gas (LNG) imported from the United States and Qatar. Those that pointed out that LNG was more expensive than piped gas – probably around 40 per cent more expensive – were dismissed and told that increased demand would lead to increased investment and this increased investment would drive prices down.
This was always a fantasy. LNG must be compressed into a liquid state using an expensive technique and then pumped into containers on expensive ships that sail the oceans, while piped gas just gets, well, pumped as a gas through a pipe. Two further events have bruised the already fragile argument for LNG. First, shipping disruptions in the Red Sea have led to less LNG being shipped from Qatar. Second, the Biden administration has caved to domestic green activists and put a moratorium on new investment in LNG infrastructure. The second of these carries a particularly nasty sting as it shows just how low a priority the European economy is on the Washington agenda. It seems almost certain that Washington will come to regret this decision as one of its largest trade partners sinks into the abyss.
The natural response to this is becoming increasingly apparent: the European Union will have to impose tariffs on imports that compete with the now-uncompetitive domestic industry. We are already hearing murmurings about the EU putting levies on Chinese electronic vehicles (EVs). No doubt, tariffs are a viable method to protect some domestic jobs, but this retreat from global markets means that Europe’s model of outward-looking trade-driven development is dead.
One country bucking the trend and trying to feel out an alternative economic model, however, is Hungary. The Chinese EV-maker BYD recently announced that it would build a state-of-the-art passenger car factory in Szeged, in south-eastern Hungary. This allows BYD to slip into the free-trade zone of the European Union just before the tottering eurocrats pull up the protectionist drawbridges.
It will be interesting to see how the economic situation develops in Europe. The present arrangements seem completely unsustainable and self-destructive – but this would not be the first time that the continent implodes under geopolitical pressure. Shadows of the 1920s loom. Perhaps given time Europe, and Britain too, will become more pragmatic in how they deal with the rest of the world and in doing so create a viable economic growth strategy. But the present trajectory is one informed by an all-encompassing bunker mentality that will almost certainly leave us isolated, alone, and poor.
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