This is what the state of Germany’s economy depends on.
This is what the state of Germany’s economy depends on.
According to current economic data, the German economy is facing an uphill battle, with the outcome depending on a few undetermined elements. A few of them are examined by Euronews Business.Recent data on the economy shows that Germany’s GDP shrank on Friday, November 24, and that its manufacturing sector is still in contraction territory, indicating that the country’s economy is still under strain.
In November, the country’s worldwide Purchasing Managers’ Index (PMI) data, which summarizes whether market conditions are growing, remaining the same, or decreasing, came in at 47.1, the highest since July and up from 45.9 in October.
But when the PMI falls below 50, it is interpreted in the economics community as an indication of contraction. In Germany’s case, this is the fifth consecutive month that the index is below 50, indicating the beginning of a recession.
What’s holding back the German economy?
Moreover, the economic powerhouse of Europe will continue to encounter formidable obstacles in 2024, including sharp drops in new orders and residential development as well as a sharp loss in affordability.These are a few indicators that we can use to determine how the German economy is doing moving forward.
Residence construction
First off, data from the IFO economic institute indicates that in October, there was a rise in project cancellations in Germany’s residential building industry, with 22.2% of enterprises reporting a cancellation rate. Since 1991, this is the biggest rise.Why is this taking place? This is because of the unfavorable global macroeconomic environment, which includes growing debt levels, tighter lending criteria implemented by the G7, and many central banks setting interest rates higher for longer periods of time.Consumers’ incomes will be under more strain in the upcoming year if this trend continues.
fresh orders for construction
It is evident that there has been a decrease in new building orders as well. According to firms, the percentage of orders fell from 46.6% in September to 48.7% in October. To put this in perspective, in October 2022, it was only 18.7%. It is an incredible 166% decrease in orders year over year (YoY/0 increasing decline).
In Germany, one in ten employment, a fifth of total output, and 6% of the nation’s GDP are generated by the building industry.It is useful to note that billions of euros were pumped into this industry following the Covid-19 outbreak, when the money supply peaked and interest rates were at an all-time low. This led to overvalued valuations and a 66% increase in property prices.
Remarkably, between 2015 and 2016, building activity/output increased by 16%.
Rising material costs
Raw material prices have increased by 40% since the start of the COVID-19 pandemic, and the European Central Bank (ECB) has raised interest rates ten times. These developments have reduced consumer confidence and purchasing power due to rising inflation.
The head of BaFin, which oversees 674 financial services firms and 1,740 banks in Germany, recently issued a warning to lenders with significant exposure to commercial real estate, stating that he anticipates additional declines in valuations.
The massive debt load of the German retail behemoth Adler Group SA is already crippling, and the development of the Elbtower in Hamburg was recently put on hold since the constructor failed to make payments on the outstanding balance.
Rising material costs
Raw material prices have increased by 40% since the start of the COVID-19 pandemic, and the European Central Bank (ECB) has raised interest rates ten times. These developments have reduced consumer confidence and purchasing power due to rising inflation.
The head of BaFin, which oversees 674 financial services firms and 1,740 banks in Germany, recently issued a warning to lenders with significant exposure to commercial real estate, stating that he anticipates additional declines in valuations.
The massive debt load of the German retail behemoth Adler Group SA is already crippling, and the development of the Elbtower in Hamburg was recently put on hold since the constructor failed to make payments on the outstanding balance.
Middle East hostilities and unstable oil prices
Furthermore, even though Europe’s stockpiles are 99% full, the possibility of another energy crisis cannot be completely ruled out as long as the Middle East conflict persists.
The output of Germany’s energy-intensive sector has already decreased, standing 17% lower than it did at the beginning of 2022. This might get worse if energy prices rise even further.
The German economy is in crisis, as indicated by the activity in the construction sector and other economic indices. But things could change drastically if the actions of the central bank and/or the outlook for the world economy suddenly changed. Investors and consumers will need to adhere to the cautious optimism philosophy up until that point.
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