Inflation and stagnation in Germany paving the way to farewell to the years of economic prosperity

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German Chancellor Olaf Scholz spoke of an industrial transformation that his country is leading at full speed when he visited a semiconductor factory or another for electric cars, but company heads and experts warn that difficult times await Europe’s largest economy.

After experiencing a recession this winter, the German economy expected to end the year in the red, joining the Eurozone countries.

While the government alone expects GDP growth in 2023, major economic institutes and the International Monetary Fund estimate a decline of between 0.2 and 0.4%.

Inflation, rising interest rates, slow recovery in China and energy prices are weighing on activity.

However, the outcome will be worse, as warned this week by the head of the Federation of German Industries, Siegfried Russwurm, and saying, “We see that the country is currently facing a mountain of increasing challenges”.

“More companies, even small and medium ones, are considering moving part of their investments outside Germany,” he said at the annual conference of the union, which brings together the political and economic elite in Germany.

Images of Germany’s progress as the “sick man of Europe” have reappeared in the media, a reference to the period during the first decade of the twenty-first century, when the country described as such due to its lack of competitiveness and high unemployment rates.

However, Scholz, who came to power at the end of 2021, prefers to refer to another period in modern history.

The German Social Democratic leader believes that the massive spending needed to install wind turbines, manufacture electric cars, decarbonize steel or chemical production, and make heat pumps in place of heating gas will create a beneficial cycle.

However, more than one expert looks skeptically at the scenario of a new golden age driven by the energy transition and green industries.

First, the transition will drain billions of euros to replace an existing stock of capital, thermal with electricity and carbon, and replace it with renewables with much higher costs,” Siegfried Russwurm said this week.

Germany expects years of slow growth and annual increases in gross domestic product of less than 1%, according to forecasts by the country’s main economic institutes.

In addition to the energy transition project, there are structural weaknesses that impede economic performance bureaucratic slowdowns, delays in digitalization and, above all, an aging demographic that leads to the labor shortages that companies are already suffering from.

With an economic model that relies heavily on industrial activity accounting for more than 20% of GDP, the country will also suffer from perpetually high-energy prices, even if they subside after hitting record levels due to the war in Ukraine.

Russia has long been the main supplier of gas to the country, which has been importing it at bargain prices.

During the industry conference, Ingeborg Neumann, chairwoman of the Association of German Textile Companies, emphasized that given “the cost of energy, the lack of skilled labor and the bureaucracy, for us, production in Germany is no longer attractive”.

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