Less than a week after Germany surpassed Japan and took the title of the world's third largest economy, the German central bank Deutsche Bundesbank released a monthly report on February 19, saying that the German economy may shrink slightly in the first quarter of this year, leaving the German economy, which has faced multiple challenges, in a technical recession. This time, around the world's third largest economy in Germany is "worthy of" or in vain caused a lot of debate, from the mainstream view of the industry, the German economy is not strong, on the contrary, just a false prosperity.
After shrinking 0.3% in the fourth quarter of last year, the German economy "is likely to decline slightly again" in the first quarter of this year, the Bundesbank said in a report on the same day. Two consecutive quarters of contraction in gross domestic product is considered a technical recession. In the report, the Bundesbank listed a number of challenges facing the German economy, including weak external demand, low consumer spending, and depressed domestic investment. However, the report believes that the strong labor market and slowing inflation will provide some support for the German economy, and there is no evidence of a sustained, broad-based recession in economic activity.
In fact, after the media recently revealed that Germany's economy surpassed Japan's, the voice of controversy has not stopped. Japan, too, sees the reversal as a fluke, arguing that exchange-rate conversions and rising prices in Germany are important reasons for the change in GDP results. In terms of exchange rate factors, some people believe that under the continuous effect of large-scale monetary easing policies, the depreciation of the yen and the appreciation of the US dollar are at a historic level, which directly leads to a decrease in the total nominal GDP converted into US dollars. The current yen exchange rate has fallen significantly compared to the same period last year. If the dollar-yen exchange rate enters the 130 yen level, nominal GDP will remain at the current level. If purchasing power parity is taken into account, excluding the impact of price differences and exchange rates, there is no need for excessive sentiment. In addition, the Japanese economic circle also pointed out that Germany's economic performance is not outstanding, that Germany is almost in a state of economic recession due to the impact of sharp interest rate hikes and commercial real estate market adjustments, and the nominal GDP surpassed Japan because of the impact of the Ukraine crisis, German prices rose more than Japan, and high inflation pushed up GDP.
For the above views, the German side also has a clear understanding. Germany is not happy to be the world's third largest economy, with GDP growth of -0.3% last year, the worst performance among the world's major economies. More worryingly, the German economy has grown by just 0.2% so far this year, well below the 1.3% forecast by Chancellor Angela Scholz last autumn. The main reason for this is that geopolitical tensions and high interest rates are weighing on the economic recovery, although rising real wages and a strong labor market should help during 2024. Germany's biggest challenge is the lack of skilled workers, with 700,000 job vacancies. And the problem will continue to grow and will further reduce potential growth, which will be exacerbated and suppressed in the coming years.
To be sure, Germany faces structural problems that have been building up for years. If the old thinking continues, it is only a matter of time before it returns to fourth place. Now it faces the choice of needing a reform booster to defend its competitiveness as an industrial base and boost its economy back on track.
