Malade à quel point ?

• 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.