!-- Google tag (gtag.js) -->

With recession looming, Germany is in a much bigger bind than Britain

olaf scholz - JOHN THYS/AFP via Getty Images

olaf scholz – JOHN THYS/AFP via Getty Images

And then there were two, possibly even three or four. As the only member of the G7 whose economy had not recovered to pre-pandemic levels, Britain was beginning to look not just like the odd man out, but the sick man of the developed world. Brexit and a very much deeper contraction than more or less everyone else experienced during the pandemic were widely blamed.

Yet the race is not always to the swift, nor the battle to the strong, and several other major economies are now fast sinking back down into the same dispiriting territory.

The way things are going Keir Starmer’s utterly ridiculous target of achieving the highest rate of sustainable growth in the G7 might actually be met before he even gets his hands on the keys to Downing Street, if indeed he ever does.

The aspiration is absurd because even if Starmer’s Labor Party could do something to improve Britain’s growth potential, it has little or no control over anyone else’s, and is therefore powerless to determine the UK’s place in the hierarchy.

Be that as it may, recent revisions to the data show that the German economy actually shrank in the final quarter of last year, unlike the UK, which merely stagnated.

Nor is the mood music in Germany around the current quarter at all good either. The manufacturing PMIs are down, and although the latest Ifo index reading suggests that things may now be picking up a bit, the second consecutive drop in Ifo’s so-called “current assessment” points to another quarter of economic contraction yet to come.

This would push Germany into the technical definition of a recession (two consecutive quarters of declining growth). But for the unseasonably warm weather and a large dollop of fiscal stimulus, which protected German consumers and industry from the full impact of surging energy prices, it could have been a great deal worse. A mild recession would have become a deep one.

as it is German GDP has already slipped back down below its pre-pandemic level, and looks set to fall further. The same fate awaits Italy, according to forecasts by Moody’s Investors Service. Japan too looks to be in the danger zone.

Things hardly look brilliant in Britain either, with the full force of rising energy bills and mortgage rates still to be felt. Even so, we seem to be on an improving trend, and no longer in such a bad way relative to others as we were.

This is the very reverse of what the International Monetary Fund (IMF) was forecasting only as recently as last month. In an update to its World Economic Outlook, the IMF said it expected the UK to contract this year, but for the rest of the G7 to show some growth.

The old rule of thumb that you should look at what the IMF is saying and then think of the opposite has once again been vindicated. In any case, the IMF may have to eat humble pie when it releases its latest “Article IV” assessment of the UK economy shortly.

As for Germany, it is not just the short term that policymakers have to worry about.

Technological and geopolitical developments have cruelly impaired the economy’s long-term prospects too. Germany has adapted with lightning speed to the curve ball thrown at it by Putin’s invasion of Ukraine, but it has been greatly helped in this regard by the warm weather, and as for one of the country’s key competitive advantages – cheap Russian gas to sustain its powerful manufacturing base – this appears to have gone for good.

Worse still, the age of the internal combustion engine, in which Germany has enjoyed a near 100-year competitive advantage, is drawing to a close, with China and others showing every sign of effectively bypassing the old technology and going straight to electric vehicles.

Germany’s ability, and determination, to adapt should never be underestimated. Besides, Germany is a large and mature economy, and therefore highly resilient to any structural change that might be thrown at it.

Some of its latest EV designs are second to none. The manufacturing capacity and infrastructure needed to make the leap into the new age is also streets ahead of anything you see in Britain, whose ability to transition its volume car making into the new age of EVs looks increasingly questionable.

Without an indigenous source of mass battery production, the future looks bleak; it is not yet clear that this week’s rescue of Britishvolt by another startup, Recharge Industries, is capable of plugging the gap. Yet the point is that these sectors have long been far more important to the German economy than they are to Britain.

Olaf Scholz, the German Chancellor, was this weekend out in the so-called “lithium triangle” of Argentina, Bolivia, and Chile, where more than half the world’s lithium reserves are thought to reside, attempting to persuade them not to succumb to the temptations of China, and side with Germany’s markets instead. In this sense, Latin America is potentially Germany’s new Russia, an abundant source of natural resources for its mass production car industry.

Technicians work on the assembly line of German carmaker Volkswagen's electric ID - REUTERS/Matthias Rietschel/File Photo

Technicians work on the assembly line of German carmaker Volkswagen’s electric ID – REUTERS/Matthias Rietschel/File Photo

Maybe he’ll succeed, but the problem is that Germany enjoys no particular competitive advantage when it comes to EVs, unlike the internal combustion engine where it has always been the world leader in design and engineering.

An EV also involves considerably cheaper, high value added parts than existing automotive technologies. Unfortunately, these are the backbone of Germany’s “mittelstand”. Large parts of German supply chain excellence are about to be made obsolete.

Schadenfreude is a German word, and we should be careful not to indulge in it when it comes to Germany itself. It is very much in Britain’s long term interests that Europe continues to thrive and prosper, so that it can provide a reasonable bulwark against the incoming tide of Eastern authoritarianism. In any case, the league table of European economies is in a more or less continuous state of flux. In the long term, it matters little who is up and who is down right now.

I doubt the settlement of the Irish border issue is going to be as much of a boost to the UK economy as some imagine. Yet a dialing down of tensions certainly cannot do any harm and may even help with a number of big investment decisions that have been held back by the threat of a trade war with Europe.

What’s certain is that belligerent talk of which economy is on top and which faces relegation doesn’t ultimately do anyone any good. We prosper together or not at all.

This article is an extract from The Telegraph’s Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered directly to your inbox every Tuesday.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top