Germany is going through a truly strange and complicated period, which could be decisive for the future of all of Europe. The country’s industrial sector is warning month after month of an ever-deepening recession. The latest PMIs, published this Monday, reflect the complicated situation well, with the Industrial production falls to 40.5 points at its lowest level for 12 months and leading the entire economy into a situation of contraction (50 points marks the growth threshold), with a surprise drop of more than one point to 47.2.
These figures were felt very strongly by the German giants of the automobile industry, stuck in a real crisis. BMW, Volkswagen and Mercedes, the big three, have posted downward forecasts due to technical problems, but also weaker business prospects and a complicated situation. This context has led to all types of industrial companies (BASF, Bosch…etc) to staff reductions. In the automotive industry, this was more clearly demonstrated than ever with Volkswagen’s decision to close factories for the first time in its history.
Until now, German employment and wages were one of the keys to understanding the ECB’s monetary policy, since its strength acted as a brake on rate cuts. That is why recent movements in the industrial sector are now ringing an alarm bell that few people anticipated a few months ago: a wave of layoffs take control of the country and accelerate the rate cuts of the European monetary institution.
The PMIs themselves highlight this point as the key and most striking one. Dr Cyrus de la Rubia, an analyst at Hamburg Commercial Bank, noted that “The slowdown in the industrial sector has deepenedevaporating any hope of recovery.” The expert points out that production has seen the biggest drop of the year as “new orders have fallen and, in a sign of resignation, companies have laid off staff at the highest rate since covid, in 2020.”
In summary, “the rate of workforce reduction, excluding the pandemic, was the highest in 15 years.” At Allianz, they believe that the trend will continue because they note that, “unlike most of the eurozone, unemployment in Germany has increased, and the latest economic data suggest that This trend could continue“For its part, the latest report from the Institute for Labor Market and Occupational Research (IAB) in Nuremberg, published this Monday, explains that it predicts an increase in the number of unemployed of 170,000 people by 2024 and 60,000 by 2025. Specifically, the institution expects the labor market to experience a complicated period with a service sector trying to absorb massive layoffs in industry.
The German labour market has been feeling the strain for some time now. The unemployment rate is gradually rising, but in a stable environment. Since In May 2022, it will reach 5%, This figure has been “crescendoing” to the current 6%, at which it was established in July 2023, and where it has not moved. Until now, these figures, although weakened and with a clear industrial contraction (they have been in the contraction zone according to PMI data since June 2022), showed stability combined with a clear growth in wages.
“Risks are tilted to the downside and the economy has now entered a technical recession”
The negotiated salaries of The region grew by 6.2% the first quarter of the year. This is something that stoked the ECB’s fears at the time. Joachim Nagel himself, the Bundesbank governor, had said at the time that “we must not cut rates hastily and jeopardize what we have achieved… Higher wage growth can translate into stronger price pressures.” Today, the threat of a wave of layoffs threatens the opposite, upending this reality, putting Germany in a complicated situation and providing a clear incentive for the ECB. The European locomotive is increasingly damaged and has major implications throughout Europe.
Higher costs, a domestic economy slowed by interest rates, external demand hit by a weaker-than-expected China and declining global trade are weighing on the country’s outlook. After falling 0.1% in the last quarter, The outlook for Germany is a small technical recessionwhich precedes stagnation. The European Commission forecasts growth of only 0.1% this year and 1% by 2025. The IMF is barely more optimistic with a lead of 0.2%.
Parthenon Economics is clear that the latest PMI data shows a clear reality in this regard. “The last time the composite index plunged at this pace, GDP was declining. In other words, “the PMIs warn that the German economy is running out of steam, after a slight decline in GDP in the second quarter. Our growth forecast for the third quarter is 0.1%, while the recent consensus is zero. Risks are skewed to the downside and the economy has now entered a technical recession“.
From Capital Economics, they point out that Europe’s prospects are totally hampered by Germany, which “is facing a technical recession and major structural challenges.” The EU’s prospects speak of a growth of 1% in 2024, weighed down precisely by the Germanic nation and an acceleration towards 1.6% for the following year.
Layoff storm in Germany
Regarding layoffs, the turning point that can change everything. The big companies will lead them, but they will be the elements of a chain of decline that affects the enormous secondary industry of small and medium-sized companies that live, to a large extent, to support the industry. Starting with the big companies, Volkswagen spoke layoffs of 30,000 employees, Although the company itself responded by saying that “we do not confirm this figure”, everything is uncertain and the magnitudes are enormous. Jefferies, for example, defended in its latest report that it expected 15,000 layoffs.
Other companies are following suit, with BMW planning to lay off 8,100 workers by the end of 2024. But the biggest problems come from the parallel industry that lives off the supply of the German engine. Parts supplier ZFplans to lay off 25% of its workforce in Germany, or 12,000 workers. Continental, for its part, has already announced a reduction of 7,000. The automotive sector as a whole has already laid off 6.5% of its workforce, according to the Phoenician Federal Employment Agency. Bosch, the world’s largest supplier of auto parts, will cut 4,000 jobs.
“Weak economic development is also reflected in weak employment development”
But the problem lies in one of the great keys to German success in the past. The Mittelstand. Medium and small companies (especially medium-sized ones) have an unusual strength in the country. They account for 60% of jobs and, although highly diversified, have become a key element in the value chain of large companies. These companies are often hyper-specialized and experiencing strong growth, but they are largely dependent on the giants of the sector and the national economy, so if their activity suffers, it can be a severe blow to employment and the economy as a whole. the country. 60% of the inhabitants of the Mittelstand are exporting companies, which is a key element of Germany’s position in the world and They represent about 52% of the country’s GDPaccording to the Ministry of Finance. These companies also find themselves in a complicated situation with high interest rates in Europe, because their lower economic power makes them more exposed to credit.
The latest Personio survey, shows that 60% of entrepreneurs The country’s financial institutions are planning staff cuts for the next 12 months. The reasons for this are precisely the economic crisis that the country is going through, which has slowed down its activity, accompanied by an increase in employees’ salaries. The IFO report goes further and warns that faced with “a huge lack of orders, companies are stopping hiring.”
According to Klaus Wohlrabe, director of the Ifo survey, “andThe weak economic development is also reflected in the weak employment development.“. The latest IFO employment survey showed a third consecutive decline in August, bringing the index to 94.8 points. In industry, the barometer has fallen further and further into negative territory. “More and more companies are considering cutting jobs,” the researchers write.
Wages will remain high
In any case, the layoffs, even if they will alleviate the problem of the tight labor market, will lead to a decrease in wages but rather a limit to their increase. The latest report from the Hans Boeckel Institute (WSI) shows an increase of 3.1% of them adjusted for inflation and 5.6% in absolute terms. In this sense, they speak of “strong real wage increases”: these come entirely from the collective agreements concluded in the first half of the year.
However, the possibility that high wages prevent inflation from falling already seems to be off. The August data were particularly relevant in this sense, as they showed how the German CPI fell below 2% (1.9%) achieve the price stability objective. In any case, wages can remain high even in the event of layoffs. At least that is what Pablo Duarte, an analyst at Flossbach von Storch, thinks, who says that this comes from the increase in unit labor costs, which in fact “have increased by more than 5% year-on-year, compared to 0.4% in 2007.” the United States. “In this sense
