How Sick?
- 11 September 2023 (5 min read)
- We take a hard look at Germany’s headwinds and policy set-up
- We still see a marginally higher-than-even probability of an ECB rate hike this week
After the Economist cover on 19 August on Germany being the “sick man of Europe” again, an article in Der Spiegel on “France being a better Germany” is making the rounds. We look into some of the German headwinds, in comparison with France and other large Euro area economies.
To some extent, it is the higher weight of some sectors which are struggling all across Europe – the car industry, or energy-intensive manufacturing – which explains Germany’s underperformance. Yet, energy prices are an undeniable specific hindrance, and beyond the sectoral issues, the whole German industry is struggling. The country is losing market shares abroad, a painful issue for such an export-driven economy and evidence that slower China is not the only source of softness. The steep acceleration in unit labour costs does not help, but this is a common feature across the Euro area. Maybe more worryingly, the specific deterioration in survey-based “perceived competitiveness” by German companies suggests that, beyond the impact of higher energy and labour costs, there may be a decline in the non-price attractiveness of German products.
Policy implications are different from the last time, 20 years ago, that Germany was dubbed “Europe’s sick man”. Wage moderation this time again would be welcome, to help deal with the Euro area’s inflation issue, but it is unlikely to bring a comprehensive solution to the difficulties on the export side. Reducing energy costs would be a key step, as well as boosting further investment in R&D and spurring innovation, but the solutions currently discussed look difficult to square with the political balance of the coalition. Germany has the fiscal space to address its issues, but the political conditions are not met.
Markets will likely focus this week on the ECB meeting. We review here why we still see a marginally higher than even probability that the central bank hikes again on Thursday – for the last time in this sequence.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.